Dave Ramsey Says To Do This If You Owe the IRS With Little Savings
Written by
Crystal Mayer
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Bestselling author and radio personality Dave Ramsey is known for helping people get out of debt. But there are a handful of times when he encourages people to take out a loan. Recently, the financial guru told a Courier Journal reader that he would recommend getting a personal loan to pay back taxes that are owed rather than remaining indebted to the Internal Revenue Service.
At GOBankingRates, we decided to dive further into why he suggested taking on debt to pay off what you owe the government. We found out why he considered this option “The Lesser of Two Evils” and listed out other ways the podcast host said people can pay off what they owe to the IRS if they have little to no savings.
‘The Lesser of Two Evils’
Ramsey rarely advises people to take on more debt, but there is an exception. In response to a couple who wrote to the Courier Journal about the $18,000 in back taxes that they owed, he recommended taking out a personal loan. The couple, followers of Dave Ramsey’s Baby Steps, had saved $1,000 for an emergency fund (Step 1) but were still working on Step 2. The second step involves paying off all of your debt except your house.
The couple inquired about whether they should pay off the taxes by taking out a personal loan or setting up payments with the IRS. Ramsey said they should take the first option, borrowing money from a local bank or credit union in order to pay off the debt. He explained, “The IRS is the worst creditor on the planet. They have almost unlimited power, which they use and abuse, and they have ridiculously high penalties and interest rates.”
Paying Back the IRS
The money advisor talks about how to get rid of IRS debt in “Tax Debt Relief: How to Handle Back Taxes.” He informed his readers that while getting out of tax debt is not easy, it can be done. He recommended taking care of it immediately if you find yourself owing back taxes. You can apply for a “Currently Not Collectible” status to get temporary relief or set up a short- or long-term payment plan with the government collection agency. Finally, some individuals may qualify for an “Offer in Compromise.”
While your individual circumstances will dictate which of these options are available to you, Ramsey also offered a step-by-step plan for anyone with lingering tax debt. He noted that you should work with a tax pro, file your returns, establish a payment plan and attack your debt in order to get back on track.
What To Do If You Can’t Pay Your Taxes
Ramsey also offered advice for people who can’t afford to pay their taxes. He explained in “What Happens If You Can’t Pay Your Taxes” that you shouldn’t ignore your tax bill. Immediately after tax day, the IRS begins charging interest and penalties. He said, “The interest rate for failing to pay is the federal short-term rate (which is set at 5% for individual taxes for thefourth quarter of 2023) plus 3% compounded daily!”
You will also be responsible for a 0.5% failure-to-pay penalty each month, up to a maximum penalty of 25% of your tax bill. Eventually, avoiding your tax bill will cause the government to file a Notice of Federal Tax Lien and it could even seize your assets. While this may all take several months to complete, the fines will only continue to stack up and cause more financial hardship.
To avoid many of these fees, Ramsey said you should file your taxes on time, even if you can’t afford to pay. Filing late can rack up additional fees. He also said you should pay as much as you can when you file to reduce the amount that you may be penalized on and to make a plan of how to pay the rest.
More From GOBankingRates
