Using a HELOC to pay off IRS tax debt

An IRS balance keeps growing with interest and penalties. A HELOC can stop that, if a tax lien doesn't get in the way first.

Reviewed by Shawn Way, NMLS #1007298★ 4.9 from 111 reviewsUpdated October 28, 2026

Compare the real cost

• IRS installment agreement: interest plus 0.25% a month penalty, setup fees, and the lien risk if not yet filed.
• HELOC: prime plus margin, a payoff schedule you choose, and the balance with the IRS goes to zero.

If there's a federal tax lien

A filed lien attaches to your home. Most lenders handle it in one of two ways: pay the IRS directly from HELOC proceeds at closing so the lien is released, or ask the IRS to subordinate the lien so the HELOC can sit ahead of it. Both take time; start early.

Be careful if

• This year's taxes will also come up short. Fix withholding or estimated payments first, or you'll need the line again next year.
• You qualify for IRS penalty relief or an offer in compromise. Ask a tax professional before borrowing.

An example: $25,000 owed to the IRS

IRS underpayment interest is the federal short-term rate plus 3 points, reset each quarter, and it compounds daily. Add the failure-to-pay penalty of 0.25% a month while on an installment agreement and the effective cost lands well above the stated interest rate. On a $25,000 balance paid over six years, interest plus penalties can easily exceed the roughly $6,340 in interest a HELOC at 7.75% APR would cost over the same six years (about $435 a month).

Penalties stop accruing once the balance is paid. A HELOC also replaces a debt the IRS can collect aggressively (levies on bank accounts and wages) with an ordinary loan.

The IRS's own options, compared

• Short-term payment plan: up to 180 days to pay in full, with no setup fee.
• Long-term installment agreement: available online if you owe $50,000 or less in combined tax, penalties and interest. Setup fees are lower if you apply online and pay by direct debit.
• Offer in compromise: settles for less than owed if you can't pay. The IRS counts the equity in your home as an asset you could borrow against, so owners with substantial equity rarely qualify.
• Currently not collectible status: for genuine hardship; interest and penalties keep growing.

How a federal tax lien affects a HELOC

A filed Notice of Federal Tax Lien attaches to your home, and a new lender won't take second place to it. You have two routes. The most common is paying the tax debt from the HELOC at closing so the IRS releases the lien. If the line can't cover the full amount, you can ask the IRS to subordinate its lien to the new loan with Form 14134, which works when the loan proceeds go toward the tax debt. Both take time; start four to six weeks ahead.

State tax debts

State tax agencies have their own interest, penalties and lien rules, and many file liens faster than the IRS. The same approach works: compare the all-in cost, then pay off at closing if a lien has been filed.

More questions

Is HELOC interest deductible if I use it to pay taxes?

No, HELOC interest isn't deductible when the money pays a tax bill. Interest is deductible only when the HELOC money buys, builds or improves the home, and paying the IRS does none of those.

Should I still file my tax return if I can't pay the IRS?

Yes, file your tax return on time even if you can't pay the IRS. The failure-to-file penalty is far larger than the failure-to-pay penalty, so file first and then deal with the balance.

Checklist

• IRS account transcript with the payoff amount.

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