In this article, we’ll explain why getting a home equity to pay back taxes can be a great alternative to an IRS streamlined payment plan.
Will you be able to get a loan?
If there is a federal tax lien on your home, you may have trouble getting a loan.
However, taxpayers or lenders also can ask that a federal tax lien be made secondary to the lending institution’s lien to allow for the refinancing or restructuring of a mortgage.
Home equity loan vs. IRS streamlined installment agreement
Example: Mark owes $100,000 in back taxes. He has $200,000 in equity in his home. The IRS offers an 84-month installment agreement. He also has the option to apply for a home equity loan and use the proceeds to pay the back taxes.
Let’s see which option comes out better financially for Mark.
Option 1: Home equity loan
Mark will get a home equity loan for $100,000. We’ll assume that he’ll pay it off in 84 months to make it easier to compare with option 2.
We were able to find a 7 year fixed rate home equity loan with an APR of 3.25%
With those terms, Mark would make monthly payments of $1,332.63 for 84 months. He will have paid total interest of $11,940.70.
Option 2: IRS streamlined installment agreement
Mark enters into an 84-month streamlined installment agreement with the IRS.
Penalties and interest will accrue even while on the payment plan.
Failure to pay penalties are 0.5% per month, but reduced to 0.25% while on a payment plan. Mark will pay 0.25% failure to pay penalties monthly and 6% interest compounded daily. Keep in mind that IRS interest rates fluctuate and have been between 3% and 11% historically. It was 6% 1st quarter of 2019.
Mark’s monthly payments would be about $1,927 over 84 months. By the end of the 84 months, Mark will have paid back his $100,000 tax, plus $10,375 failure to pay penalties, and $51,492.10 interest.
Mark saves a whopping $50,000 under Option 1.
Is ever a good idea to get a payment plan instead of a home equity loan?
There are some situations where it might be good idea to enter into a payment plan with the IRS.
If you are close to retirement or expect to be out of work for a long period of time, you might later qualify for currently not collectible where you would pay nothing to the IRS until your financial situation changes.
You should always explore any other IRS debt relief programs you may qualify for before committing to add more debt.
You should always consult with a tax professional before making any decisions about how to best resolve your tax debt.