If you’re behind on taxes, you might be wondering if owing the IRS hurts your credit score. Negative marks on your credit score can have a lasting impact, making it more difficult to apply for a credit card, car loan, home mortgage, and more. When qualifying borrowers, lenders want to see a demonstrated history of fulfilled financial obligations—including your tax liability to the federal government.
Therefore, it’s important to understand the relationship between the IRS and credit scores in order to maintain strong financial health. Keep reading to learn more about how you can climb out of owning taxes, repay the IRS, and restore your credit score.
Falling behind on taxes can be stressful, especially if you’re worried about how it could impact your credit score. Many people wonder if setting up an IRS payment plan will show up on their credit report and hurt their credit.
The good news is that in most cases, IRS payment plans do not affect your credit score Here’s what you need to know about how IRS payment agreements interact with your credit report and FICO score
How the IRS Approaches Credit Reporting
The Internal Revenue Service does not directly report tax debts or payment plans to the major consumer credit bureaus – Equifax, Experian, and TransUnion. The IRS is focused on tax compliance and collection, not influencing credit scores.
There are two main ways the IRS could indirectly affect your credit
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Federal Tax Liens – If you owe $10,000 or more in back taxes, the IRS may file a public Notice of Federal Tax Lien. This gives the IRS a legal claim to your current and future property. Tax liens used to appear on credit reports, but no longer do after policy changes in 2018. However, lenders can still find them through public records searches.
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Levies & Seizures – If you don’t make payment arrangements, the IRS can escalate to aggressive collection tactics like wage garnishment, bank account levies, or property seizure. These events could show up as negative marks if the creditor reports the account status change.
As long as you avoid liens and levies by making payment arrangements, an IRS payment plan is unlikely to impact your credit score.
The Effect of IRS Installment Agreements
IRS installment agreements, also called payment plans, allow taxpayers to pay off tax debts in smaller, more manageable monthly payments over 6-72 months.
The IRS does not report installment agreements to the credit bureaus. As long as you stick to the payment terms, the plan will not show up on your credit report or affect your credit score. This allows taxpayers to get square with the IRS without damaging repercussions to their creditworthiness.
Even if you owe past-due taxes, requesting an IRS payment plan shows good faith. As long as you file all required returns and negotiate a payment arrangement, the IRS will not file a tax lien or pursue collections. This prevents credit damage while you work to pay off the liability.
Why the IRS Doesn’t Report Payment Plans
There are a few reasons why the IRS doesn’t report installment agreements to credit bureaus:
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Federal privacy laws restrict the IRS from sharing tax information with third parties. Installment plans contain personally identifiable tax data.
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Tax debts and consumer debts are governed by different sets of laws. The IRS has its own procedures for pursuing unpaid liabilities.
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Credit damage could make it harder for taxpayers to pay back taxes owed. The IRS prioritizes tax compliance over impacting credit scores.
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Credit reporting of installment plans would discourage taxpayers from making payment arrangements. This could lead to more aggressive IRS collection actions.
By keeping installment agreements off credit reports, the IRS facilitates tax resolution without pushing taxpayers deeper into financial hardship.
How to Keep IRS Debts Off Your Credit Report
To avoid having tax issues affect your credit, the key is staying compliant with filing and payment obligations before debts get out of hand. But if you already owe back taxes, take proactive steps:
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File all past-due returns – The IRS cannot approve a payment plan for unfiled returns. Handle this first.
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Request an installment agreement – This prevents IRS collection actions as long as you make on-time payments.
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Pay off the balance – If possible, paying in full quickly releases any liens and prevents escalation.
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Respond to all IRS notices – This shows you intend to address the liability and won’t let it spiral.
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Seek tax resolution help – Professionals can negotiate payment plans or settlements with the IRS on your behalf.
The Bottom Line
IRS installment agreements and payment plans do not appear on credit reports or directly influence credit scores. However, unpaid tax debts that lead to liens and levies can indirectly damage creditworthiness.
Avoiding penalties and aggressive collections by proactively filing returns and arranging payments keeps the IRS from affecting your credit. If you already owe back taxes, act quickly to establish an IRS payment plan so you can resolve your tax debt without hurting your credit score.
Does the IRS report to credit bureaus?
The IRS does not report to credit bureaus unless overdue taxes are left unpaid. Say, for example, you file a tax return and end up owing more than you anticipated; this by itself won’t hurt your credit score. You also will not receive a positive credit score improvement in response to timely tax return paid in full, even though that may deserve some merit.
If you’ve received an IRS tax audit, then you can rest a little easier knowing that they are not automatically disclosed to the credit bureaus. But if the auditor determines that you owe money and you do nothing about it, the problem may escalate and result in IRS credit score consequences.
Essentially, the IRS only reports to the three major credit bureaus—TransUnion, Experian, and Equifax—when mounting taxes owed goes unresolved and reaches past a certain threshold. You’ll always receive plenty of notice regarding your back taxes before owing the IRS winds up hurting your credit score. We’ll take a closer look at that process in the sections that follow.
How does owing the IRS affect your credit score?
To understand how owing the IRS may affect your credit, you should first know how credit scores are calculated. According to MyFICO, there are five separate components that contribute to your overall FICO® score; if the IRS issues a federal tax lien, the tax owed will negatively impact your “Payment history” and “Amounts owed”.
As the two largest categories with the most weight on your credit, this derogatory mark can severely lower your score depending on how much you owe and how long the taxes owed are left unpaid. When a tax lien is filed, it will stay on your record for seven years even after it’s paid, but unpaid tax liens can stick around for as long as 15 years.
However, a lot has to happen before the IRS files a Notice of Federal Tax Lien and hurts your credit as a result. If you owe the IRS a relatively small amount and show due diligence to pay back your taxes, you likely don’t need to worry.
Does IRS Payment Plan Affect Credit Score? – CreditGuide360.com
FAQ
Do IRS payment plans affect credit score?
Taking the step of setting up a payment arrangement with the IRS does not trigger any reports to the credit bureaus. As mentioned above, the IRS is restricted from sharing your personally identifiable information. While a Notice of Federal Tax Lien could be discoverable by lenders, the payment plan itself would not.
What are the negatives of the IRS payment plan?
Here are the main disadvantages of IRS Installment Agreements: Throughout the duration of your Installment Agreement, any outstanding debt will continue to accrue penalties and interest for unpaid taxes on a monthly basis.
Does a payment plan affect credit score?
Does IRS payment show up on credit report?
Does the IRS report to credit bureaus? The IRS does not report to credit bureaus unless overdue taxes are left unpaid. Say, for example, you file a tax return and end up owing more than you anticipated; this by itself won’t hurt your credit score.