When you think of Dave Ramsey, you think of financial freedom, debt-free living and his famous mantra: “Debt is dumb, cash is king.” But what happens when the dreaded IRS comes knocking with a hefty tax bill you didn’t prepare for? Surprisingly, even Ramsey says borrowing money might be the lesser of two evils in this specific case.
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On an episode of the EntreLeadership Podcast, Ramsey tackled a real-world scenario from a business owner, Ross, whose electrical contracting business faced an unexpected $200,000 tax bill. Ross admitted he had focused all his extra cash on paying off other debts, leaving nothing aside for taxes. The accountant’s suggestion? Borrow the money from the bank to settle the tax debt. While this might sound like heresy to Ramsey’s usual no-debt philosophy, he agreed.
Ramsey didn’t whitewash the reality: if you owe the IRS, you’re in trouble. “You’d rather owe the bank on a line of credit than you would the KGB,” he said, pointing out that their penalties and interest rates are far harsher than any bank loan. The priority, he emphasized, is to get the IRS out of your life as quickly as possible.
Borrowing from a bank might sting, but it’s a strategic move. Ramsey explained that most lines of credit carry lower interest rates – often around 8% or so – which are far more manageable than the fines and stress that come with unpaid taxes. You do not want the IRS breathing down your throat, he warned.
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While agreeing with the borrowing strategy, Ramsey didn’t let Ross off the hook for how he ended up in this mess. “You’re running this like it’s a $1 million business” when it’s a $10 million business, he said bluntly. Ramsey stressed the importance of monthly tax planning, robust accounting systems and professional oversight for a business of Ross’ size. He suggested hiring an in-house controller or CFO and upgrading from entry-level software like QuickBooks to more sophisticated tools like NetSuite.
