Should you take a loan to pay the IRS, or set up a payment plan?
A client recently asked me why he should take out a loan to pay the IRS instead of just setting up an installment agreement.
It's a fair question. Here's what I told him.
An IRS payment plan isn't free
An installment agreement doesn't freeze the cost of the debt. While you're on the plan, you still pay:
IRS interest. For the fourth quarter of 2026, it's 7% a year for individuals, compounded daily. The rate can change every quarter.
The failure-to-pay penalty. For an individual who filed on time and has an approved plan, it's 0.25% a month. If you didn't file on time, it's generally 0.5% a month.
A setup fee. Depending on how you apply and how you pay, the IRS charges from $29 to $178 (lower or waived for low-income taxpayers).
A simple example
Say you owe $10,000. If nothing else changed for a year:
interest would be roughly $725,
the failure-to-pay penalty would be about $300.
That's about $1,025, or a little over 10%, before the setup fee.
In real life, the cost goes down as you pay the balance down. But the point stands: the IRS is charging you for the time.
How a loan compares
A bank loan is different. If you use it to pay the IRS in full, the IRS interest and penalty stop on what you paid. Your cost becomes whatever the bank charges.
So:
If the loan is cheaper than the IRS stack, the loan can make more sense.
If you can't get a loan, or the rate is worse, the installment agreement is still the way to pay over time without enforced collection hanging over you.
It's not that one is always better. It's that an IRS payment plan isn't free, and people treat it like it is.
Things to watch with a loan
Don't put your home at risk lightly. A secured loan you can't repay can be worse than an IRS plan.
Credit cards are usually expensive. Compare the real rate, plus any card processing fees.
Business owners: paying off the IRS with a loan won't fix a cash-flow problem that keeps creating new tax debt.
Things to know about IRS payment plans
Simple Payment Plans. Individuals who owe $50,000 or less in assessed tax, penalties and interest, and are current on filing, generally qualify without a financial statement.
Collection generally pauses. The IRS generally won't levy while a payment plan request is being considered or while the plan is in effect.
Refunds go to the debt. Future refunds are applied to your balance until it's paid.
The lien doesn't disappear. A payment plan doesn't remove a federal tax lien by itself. In some cases, a direct debit plan can help you get the public lien notice withdrawn.
Stay current. Missing payments or new balances can default the plan.
How I help you decide
I look at your full picture: what you owe, the IRS rate right now, the loan you can actually get, your cash flow and whether there's a lien in the way of financing. Then I tell you which path I think costs less and is safer for you.
Short FAQ
Does the IRS charge interest on payment plans? Yes. Interest keeps running, plus a failure-to-pay penalty. For individuals who filed on time, that penalty is 0.25% a month during an approved plan.
Is it smart to take a loan to pay the IRS? Sometimes. If the loan's total cost is lower than IRS interest plus penalties, it can be. Compare carefully, and don't risk your home lightly.
Will a payment plan stop a levy? Generally, the IRS won't levy while a plan request is pending or while the plan is in effect.
How much does an IRS payment plan cost to set up? From $29 to $178 depending on how you apply and pay, with reduced or waived fees for low-income taxpayers.
Trying to decide?
Book a free 30-minute call to go over your case. For a quick question, you can call (718) 510-3166. I'll run the comparison with you.
General info, not advice for your specific case.
