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Personal Loan for Taxes

Published at January 25, 2018 by Ana-Maria Sanders

Learn what you need to know before taking out a personal loan to help pay off what you owe on your federal taxes for your 2017 income tax return.

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Every April, millions of Americans stress out about their taxes. To reduce stress, many turn to accountants and tax preparation services. When the ensuing mushroom cloud of paperwork settles down, sometimes the numbers show that a refund isn’t in the cards and money is owed to Uncle Sam. That leads many to reach out for help. Below we look into the pros and cons of using a personal loan to pay your taxes.

How Helpful is a Personal Loan for Taxes?

Using personal loans to pay your 2017 taxes won’t help you on 2018’s taxes because in most cases, you cannot deduct the interest on personal loans. Yet interest on some types of personal loans can be deducted from your taxes. Interest paid on personal loans on vehicles used for business or personal loans used to finance business expenses is tax deductible. In addition, interest paid on mortgages is deductible, but most people don’t use personal loans to purchase real estate.

Since interest on personal loans for paying off your taxes is generally not tax deductible, using this type of funding to pay your taxes won’t benefit you on next year’s taxes. So is there any benefit to taking out a loan to pay your taxes?

If your wallet and bank account are slim, but you need to pay your taxes, a personal loan is one good option. Before taking out a loan, you should learn what the interest rate will be and compare that to the interest you would pay the IRS. Also, you should figure out the monthly payments on the loan to see if you can afford them. Additionally, if taking out a personal loan online will help you avoid a tax lien, it might be a wise choice. It is certainly a better idea than not paying your taxes and having your property seized by the IRS.

IRS Penalty Interest Rates for Unpaid or Late Taxes

Tuesday, April 17 is the deadline for filing your 2017 taxes. Yet even though the date is nearly the same each year, it still creeps up on some people. A number of Americans end up not paying their taxes on time. Some don’t pay their taxes at all. Both groups face penalties from the IRS.

Below are 8 important things to know about IRS penalties for late and unpaid taxes:

  1. Not filing your taxes by the filing deadline may result in a “failure-to-file penalty.” This penalty may also apply if you don’t pay all of your taxes by the filing deadline.
  2. In general, the failure-to-file penalty is greater than the failure-to-pay penalty. Even if you are unable to pay your taxes, it is always better to file your taxes by the deadline. To reduce the interest you will pay for late taxes, pay as much as you can. If you can’t pay all of your 2017 taxes, the IRS will work with you. The IRS also suggests exploring alternative payment options like paying in installments.
  3. The late-filing penalty is usually 5 percent of your unpaid taxes each month that your taxes are late until you have paid in full. The IRS begins calculating the interest the day after the tax filing due date. This penalty will never be more than 25 percent of your total unpaid taxes.
  4. Not paying your taxes by the filing deadline brings a failure-to-pay penalty of 0.5 percent of one percent of your unpaid taxes. This penalty applies monthly (or for a portion of a month). The IRS begins calculating the interest the day after the tax filing due date.
  5. If you know you can’t pay your taxes, you may request a filing extension. However, you must still pay 90 percent of the taxes you owe when requesting an extension. But you might not face a failure-to-pay penalty. At the same time, you must pay the balance before the extended due date.
  6. If you face both the 0.5 percent failure-to-pay penalty and the 5 percent failure-to-file penalty in the same month, the most you will pay for both is 5 percent.
  7. If you file your tax return more than 60 days after either the due date or the extended due date, you must pay a minimum penalty of either $135 or 100 percent of the unpaid tax, whichever is smaller.
  8. If you can demonstrate reasonable cause for not filing or not paying on time, you don’t need to pay a late-filing or late-payment penalty.

In some cases, the IRS offers special penalty relief depending on a tax filer’s circumstances. This is especially true if you suffered a natural disaster such as a wildfire, tornado or hurricane.

IRS Penalties Vs. using Loans to Pay Taxes

How do the IRS penalties compare to the average interest associated with personal loans? As stated above, not paying your taxes on time (or not at all) could result in you paying as much as 25 percent of the amount of the taxes you owe. If you owe $1,000, that could be as much as $250 extra. Thankfully, it may be possible to find a personal loan for taxes that can save you money.

Since the IRS charges you interest on unpaid or late taxes, if you are considering a personal loan, doing it sooner will save you from paying interest to both the lender and the IRS. You can request a loan through LoanStart for as much as $40,000. The actual interest rate you receive depends on your credit score, credit history, and the lender’s terms.

Ronald Smith’s Million Dollar Idea

For decades now, tax return loans have allowed Americans to get their tax refund now rather than waiting.

Let’s take a look at Refund Anticipation Loans, explore the IRS penalties for not paying your taxes, and show how a tax refund loan might be able to benefit you.

In 1985, an accountant in Virginia Beach, VA had an idea. Ronald Smith, of Action Accounting & Taxes, advertised “Loans On Tax Refunds,” a service that allowed tax filers to get a Refund Advance Loan (also a Refund Anticipation Loan or RAL). The service, the only service of its kind in the entire country, quickly became popular in the Virginia Beach and Hampton Roads area. Smith went on to make millions of dollars offering tax refund loans.

Around the same time that Smith’s Action Accounting & Taxes advertised this new service, only a mile away, John Hewitt purchased a local tax service. In 1988, Hewitt also began offering tax refund loans, building a nationwide franchise (Jackson Hewitt Tax Service) based on Smith’s original idea.

The following year (1989), H & R Block added RALs, doubling its business making tax refund loans into a billion dollar industry. The IRS’ 1990 introduction of e-filing made tax refund loans even quicker and easier, spreading this service to even more businesses across the nation. Before e-filing, tax filers had to wait two to three months to get their refunds from the IRS. The promise of getting tax refunds within a few days is one of the main reasons why the service spread so rapidly.

Over the next few years, thousands of tax firms and accountants entered the refund anticipation loan business. RALs have become commonplace, and in 2004, 12 million American taxpayers used refund anticipation loans.

What is a Tax Refund Loan?

One of the main benefits of a tax refund loan is not needing to wait for your tax refund. In most cases, you can have the money as soon as the next business day. Otherwise, taxpayers must wait as long two to three weeks for their tax refund. Basically, here’s how these tax return loans work:

  • A tax preparer or lender gives you the amount of money you are expected to receive from the IRS as a loan, minus a fee for their services.
  • Later, when the IRS issues your refund check, it goes to the tax preparer, financial institution, or lender.
  • Your loan will be paid off once they receive your refund from the IRS.

As you can see, this is very different than taking out a loan to pay your taxes. You will likely have more time to pay off a personal loan than you would a tax refund loan. These short-term tax refund loans are meant to be paid off within a few weeks, the anticipated amount of time it will take for the borrower to receive their tax refund from the IRS.

Loan Provider Responsibilities

As a consumer considering a tax return loan, you should be aware of your rights as well as your loan provider’s responsibilities. These loans are an agreement between you and the lender or tax service and do not involve the IRS. To protect consumers who take out an RAL, the IRS requires loan providers to adhere to certain rules. Providers must:

  • Be sure that you understand that choosing a refund-related financial product means you will not get your refund from the IRS. Instead, the IRS will send your tax refund to the provider or financial institution.
  • Advise you that an RAL is not a faster way to receive your refund from the IRS, but an interest-bearing loan.
  • Advise you that if they (the provider or lender) do not receive your refund from the IRS in a certain amount of time, you may be responsible for additional interest and fees.
  • Advise you on any and all fees, interest and deductions which will be paid to them from your tax refund as well as the final amount due to you.
  • Secure your written consent to disclose your tax information to the provider, tax preparer, or financial institution to complete your application for a refund-related financial product (as specified in Treas. Reg. § 301.7216-3(a)).
  • Be sure that the tax return preparer is not a related taxpayer (according to §267 or §707A) to the provider making the RAL agreement.
  • Adhere to all IRS Advertising Standards and Fee Restrictions. These fee restrictions include only charging a flat fee for tax refund-related products. The IRS also prohibits providers from computing fees based on a percentage of the refund or any other figure from your tax return. The provider’s fee must be the same for every customer. Providers also cannot accept fees from financial institutions which depend on the amount of the refund. 

In light of all of the above, the IRS and the Department of the Treasury make no guarantees that tax refunds will be deposited within a certain timeframe. The Treasury does not even guarantee that your entire refund will be deposited at the same time. This means that if you take out a tax return loan and your funds don’t arrive on time resulting in additional fees, the IRS is not responsible.

Apply for a Refund Anticipation Loan Today

Not paying your taxes on time (or not at all) results in financial penalties. When tax times rolls around, there is no need to stress out. If you expect to get a tax refund and need it now to pay off bills, repair your vehicle or start a home improvement project, a Refund Anticipation Loan let’s get your cash now without having to wait for the IRS.

If you are not receiving a refund and need money to pay your 2017 taxes, we can help you get started today and request a personal loan.

Ana-Maria Sanders   LoanStart Marketing Manager
Personal Finance
Ana-Maria Sanders has always enjoyed helping people manage their finances. She has fond memories of helping her grandma cut offers out of the newspaper. As the main content writer and marketing manager for LoanStart, Sanders continues to help guide people through the complicated world of personal finances. She especially likes teaching people how to borrow and pay back loans.

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