When you still owe the IRS for past taxes, it’s likely that the agency will be more willing to work with you—such as allowing you to pay your tax in monthly installments. To find out more about how owing the IRS will affect your credit watch this video.
Hello, I’m Scott from TurboTax, with important news about how your tax debt can affect your credit. When you still owe the IRS for past taxes, it’s likely that the agency will be more willing to work with you—such as allowing you to pay your tax in monthly installments—than your other creditors may be.
Since the IRS is an agency of the federal government, there are procedures in place that protect your credit score from being tarnished just because you owe taxes. For example, if you prepare your tax return and still owe additional taxes with it, this by itself is not going to impact your credit score. It’s only when you fail to pay what you owe in a timely manner, that your credit score can be affected.
The amount of tax you owe is a significant factor in determining whether your credit score will be affected. This is because your credit is only affected once the IRS files a Notice of Federal Tax Lien in court. But the IRS won’t do this unless the amount you owe exceeds a certain threshold. A tax lien can give the federal government a legal claim to every asset you own—including your home, your cars, or other property. And if it reduces your credit score, it can become more difficult for you to obtain credit in the future.
It’s important not to confuse a lien with a levy. A levy means that the government can seize your assets to cover your tax debt. On the other hand, a lien just gives the government a legal claim to your property. You get to keep your property, but the lien makes it incredibly difficult to sell.
You will always receive plenty of notice before your outstanding tax bill will hurt your credit score. The IRS will send notices informing you of the debt and requests for payment. When you receive a demand for payment, this may be your last opportunity to work something out with the IRS to protect your credit. In some cases, you may still be eligible to make monthly payments. But even if you are, the agency can still obtain a lien if it decides it’s necessary to insure repayment of your entire tax bill.
The IRS is usually willing to work with you—so you should take every opportunity to preserve your credit rating by addressing any tax issues head on, as early as possible.
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Owing back taxes to the IRS can be a stressful situation. Many people worry that not paying their tax debt will hurt their credit score and make it harder to get loans or credit cards. But does the IRS actually report unpaid taxes to the credit bureaus? How does tax debt impact your credit score? And what can you do to resolve back taxes without damaging your credit? This comprehensive guide answers all those questions and more.
Does the IRS Report Unpaid Taxes to Credit Bureaus?
The IRS does not routinely report unpaid taxes to the major credit bureaus (Experian, Equifax, and TransUnion). So owing back taxes will not directly show up on your credit report or immediately lower your credit score.
However, that does not mean tax debt cannot eventually impact your credit. If you ignore IRS notices and allow tax liens or levies to be placed, that information gets reported and can seriously harm your creditworthiness.
Here are some key points on how the IRS, unpaid taxes, and credit reporting interact:
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The IRS does not report owed taxes to credit bureaus after you file a return, Even balances due on your tax return are not shared with credit agencies,
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Underreporting income or issues flagged in an IRS audit also do not get reported to the credit bureaus
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Tax liens and levies, which are used to collect unpaid debts, are reported and damage credit scores.
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Entering an IRS payment plan or offer in compromise does not affect your credit. These collection alternatives are not shared with credit bureaus.
So while simply owing back taxes does not hurt your credit, allowing the debt to go unresolved can eventually lead to credit damage when the IRS takes more aggressive collection actions.
How Unpaid Taxes Impact Your Credit Score
If you owe back taxes and do nothing to address the debt, several things can happen that indirectly harm your credit:
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Tax liens filed by the IRS are reported to credit bureaus and lower your credit score. A federal tax lien gives the IRS claim on your assets and property. Tax liens remain on your credit reports for seven years from the filing date.
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The IRS can levy your wages and bank accounts, reducing your available income to pay bills. This increases your credit utilization ratio and lowers credit scores.
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With less disposable income from a tax levy, you may miss payments on existing debts and loans, damaging your payment history.
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Additional fees, penalties and interest that accrue on unpaid taxes increase the amount owed to the IRS and other creditors. Higher debt loads lower your credit score.
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Tax liens and levies must be resolved to get a mortgage, potentially preventing you from buying a home if you have unresolved IRS debt.
So while the IRS does not directly report unpaid taxes to credit bureaus, the downstream impacts of leaving tax debt unaddressed can significantly hurt your credit over time.
How Long Before Unpaid Taxes Affect Your Credit?
It can often take 1-2 years (or longer) before unpaid taxes eventually work their way into impacting your credit scores and reports. Here is a general timeline:
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3-6 months: IRS sends first notices requesting payment for taxes owed. No credit impact yet.
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6-12 months: Additional IRS notices sent if you do not resolve debt. Penalties and interest accruing.
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1-2 years: IRS may file a tax lien against you, which gets reported and damages credit scores.
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2-3 years: IRS may issue a tax levy if you still have not addressed tax debt. This reduces income available to pay other debts.
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3+ years: Missed payments and increased balances on other debts due to levy lower your credit scores.
As you can see, it takes some time before unpaid taxes eventually hurt your credit indirectly. But this gives you a window to resolve IRS debt before it damages your creditworthiness.
How to Handle Back Taxes Without Hurting Your Credit
Here are some tips to deal with unpaid taxes and avoid credit damage:
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File all tax returns, even if you cannot pay. This stops failure to file penalties.
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Use IRS payment plans to pay over 6-72 months. Installment plans do not impact credit.
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Request an Offer in Compromise to settle tax debt for less than owed. This requires strict eligibility.
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Ask for Currently Not Collectible status if you cannot pay. This pauses IRS collection efforts.
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Address any IRS notices immediately to prevent additional penalties and interest.
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Consider credit counseling or debt management services to handle debts alongside tax resolution.
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Communicate with the IRS. They can provide more time if you stay responsive.
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Work with a tax professional for optimal resolution strategies and navigation of IRS protocols.
The bottom line is you have options to resolve IRS tax debt even if you cannot pay in full. And taking action quickly can help prevent unpaid taxes from negatively affecting your credit down the road.
Will Paying Back Taxes Improve Your Credit?
Resolving IRS tax debt and getting into good standing can remove any tax liens filed against you that are impacting your credit. However, simply paying off old tax balances does not boost your credit score by itself.
You need to rebuild credit in other ways, such as:
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Pay all current debts on time going forward. On-time payments are the biggest factor influencing credit scores.
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Keep credit card balances low. High utilization hurts credit, even if you pay in full each month.
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Limit new credit applications. Too many hard inquiries when opening new accounts lower scores temporarily.
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Build credit history with new responsible accounts reported to credit bureaus.
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Wait for tax liens to fall off your reports after seven years.
So get current on back taxes to avoid further credit damage, but you’ll need positive credit history to raise your scores again. An improved payment history and lowering debts will help rebuild credit after resolving IRS tax debt.
Key Takeaways on Unpaid Taxes and Your Credit
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The IRS does not report unpaid taxes directly to credit bureaus. But related collection actions can eventually impact your credit.
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Tax liens and levies that occur after 1-2 years of unresolved tax debt are reported to credit bureaus and lower scores.
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Paying back taxes removes any associated tax liens but does not automatically improve your credit. Timely payments and reduced debts must rebuild your credit.
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Act quickly to address IRS tax debt before it gets to the point of hurting your creditworthiness. Use payment plans, offers in compromise, and other tax resolution strategies.
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Work with a tax expert for optimal handling of back taxes, IRS negotiations, and preventing credit damage. Do not ignore tax debt and collection notices.
Managing unpaid taxes requires a careful balancing act to satisfy IRS obligations while minimizing harm to your credit standing. But taking proper steps can resolve tax debt without destroying your credit in the process.
Looking for more information?
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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Does Owing the IRS Affect Your Credit Score? – CreditGuide360.com
FAQ
Does owing back tax affect credit?
Your taxes, tax liens or debts won’t be included in your credit history. However, the IRS may send your tax debt to a collections agency, which can impact your credit score, as collection is considered a derogatory mark.
What happens if you owe back taxes?
The IRS may levy (seize) assets such as wages, bank accounts, Social Security benefits, and retirement income. The IRS also may seize your property (including your car, boat, or real estate) and sell the property to satisfy the tax debt.
Does a tax refund affect credit score?
The short answer is no. “A tax refund does not directly impact your credit score because the IRS doesn’t interact with or report information to credit bureaus like Equifax, Experian, and TransUnion,” said Andrew Wang, managing partner at Runnymede Capital Management.
Can lenders see if you owe taxes?
Second, the bank will search public records to see if there are any tax liens on your property. IRS tax liens no longer show up in your credit history, but they are public records, so they can be easily found during the loan underwriting process. Third, the lender will ask to review your past years’ tax returns.