You probably know too well the old adage that life’s only two true certainties are death and taxes. Therefore if your business finds itself owing a tax debt to the IRS then you can rest assured that sooner or later, it is going to have to be paid, and in full (and no, bankruptcy does not annul tax debts!).

That said, while owing unpaid tax to the IRS can be both stressful and problematic, it is not necessarily catastrophic for a business. In this post we will take a closer look at how a government tax debt works and when it might be beneficial to seek a tax relief loan or additional financing to repay them. We will also look at whether it is possible to use an SBA loan to pay tax and whether the scheme can be used in lieu of (business) tax debt loans.

How a US Government Tax Debt Works

There are many reasons why individuals and businesses end up owing unpaid taxes. Common reasons are under-estimating potential liability, changes to tax laws or regulations, and in some cases a business may feel it has no choice other than to use the monies set aside for taxes for an emergency. Regardless of the reasons though, the consequences and implications of owing the IRS are always pretty much the same.

Firstly, the IRS will not simply sit by quietly whilst money is owed to them. Instead tax debts will be actively pursued and this action may include the issuing of notices, sending officers to visit, garnishing wages, taking money directly from bank accounts, and in extreme cases, even the seizure of property.

Furthermore, outstanding tax debt balances are subject to annual interest of 5% which is significantly above both base rates but below the current rate inflation. The IRS will also levy additional ‘failure to pay penalties” ranging from 0.5% to 1% on accounts where they feel the debtor is refusing to fully engage with recovery efforts.

Finally, owing the IRS also impacts on credit score and may even result in travel restrictions! In short, you really do not want to get into debt with the fed.

Business Tax Debt Loans

If your business owes money to the IRS that it is currently struggling to repay, then one possible solution may be to seek financing from the financial marketplace.

Is There a Tax Relief Loan?

Whilst there is such a thing as a specific “business tax debt loan” or a tax relief loan, obtaining credit to consolidate debt or to refinance is actually very commonplace. Therefore borrowing from a bank or credit specialist to pay the IRS is a perfectly viable strategy especially as business loans can sometimes be obtained fairly easily.

Of course, any business that owes a government tax debt may find it a bit of a struggle to obtain reputable bank credit and may be driven towards backstreet lenders. That said, there are a number of lenders who guarantee business loans to bad credit applicants operating in some US states.

If your business has property or assets then you may be able to obtain a secured loan against them which generally offers favourable interest rates. Alternatively, you will have to look for unsecured business lending where the annual interest rate may well be higher than the 5% that the IRS applies.

Should I Repay or Should I Owe? Business Tax Debt Loans Vs Owing The Fed

Owing the IRS just “feels” wrong to many of us. Indeed many just would prefer to repay the IRS and get the fed off their back ASAP, even if that simply means shifting the debt to a bank or lender in the private sector.

However, in some cases it may actually prove more cost effective to owe the IRS rather than getting into debt with a creditor. As we stated earlier, the annual interest on tax debts is 5%. Whilst this is above central bank base rates, it is still lower than the APR offered by most unsecured business loan lenders (which can range from 7% – 350%!). As such hastily taking out a loan with a higher interest rate may mean paying back more money in the long run.

That said, the IRS is not exactly patient when it comes to agreeing repayment strategies and may insist on a monthly repayment amount that maxes a business out in order for the debt to be repaid within a 12 – 24 month period. Lenders on the other hand are happier to agree longer term repayment periods which means a more affordable monthly repayment amount. Additionally, owing the IRS will negatively impact credit ratings whereas properly servicing a business loan, can even enhance credit ratings.

Ultimately, choosing to owe the IRS rather than refinancing is a highly problematic strategy only to be utilised in extreme cases. Instead there are many benefits of effectively taking out a tax relief loan.

Can You Use an SBA Loan To Pay Taxes?

As SBA (Small Business Administration) loans are ultimately underwritten by the government, using an SBA loan to pay tax or the IRS debt may seem a bit like robbing Auntie Sally to repay Uncle Sam.

That said, it is nevertheless theoretically possible to use an SBA loan to repay a tax debt. In particular, the popular SBA 7(a) program states that the loan may be used for a wide range of purposes including for “refinancing debt for compelling reasons”. As such it falls to the applicant to convince the underwriter that repaying the fed constitutes a compelling reason.

Of course SBA loans rates start at 7% which is higher than the interest applied by the IRS. Further, they are usually only awarded to businesses with good working capital and strong credit scores; as such, this option may ultimately prove to be something of a non-starter.

Final Thoughts

Whilst tax debts are far from ideal, there are several ways in which a business can deal with them. Owing and repaying the IRS is sometimes viable, but there are also plenty of lenders out there who can provide the necessary financing to pay down the tax burden once and for all.