Does Owing The IRS Affect Your Credit Score?
TABLE OF CONTENTS
Key Takeaways:
- Owing money to the IRS will not affect your credit score unless a federal tax lien is filed against you.
- A federal tax lien is a government entity’s legal claim against a taxpayer’s assets to secure payment for unpaid tax debt and a federal tax levy is the process of actually seizing the assets.
- As of 2018, federal tax liens are not listed on individuals’ credit reports, but that information is still accessible as part of their public records.
- Applying for the IRS Fresh Start Program can help taxpayers manage their tax debt and avoid having a federal tax lien placed on their account, which can save their credit score from being affected.
Does Owing The IRS Affect Your Credit Score?
If you owe taxes to the IRS, this does not necessarily mean that your credit score will be impacted. Many people file their federal income tax for certain tax liabilities for their earnings from the previous year. Still, failing to pay what you owe the IRS in a timely manner can ultimately cause longer-term effects on your finances, such as affecting your credit score.
What Is A Credit Score?
A credit score is a 3-digit number usually ranging from 300-850 that represents a prediction of an individual’s credit behavior, which can highlight how likely a person is to pay back a loan on time. There are several factors that contribute to a person’s credit score calculation, including their history of paying bills, their current debt, their loan history, and how much available credit they are using.
If a person has a negative credit score or obtains red flags on their credit report, in the case that they want to apply for new credit cards or loans, they may find difficulty in proving that they are reliable in their ability to make payments toward the amount they owe.
During What Situation Does Owing The IRS Affect Your Credit Score?
If you currently have unpaid tax debt, the good news is that your credit score will not be affected unless the IRS files a Notice of Federal Tax Lien in court. The IRS will send you multiple letters regarding your tax debt, tax debt relief options, and warnings before moving forward with the issuing of a tax lien, so it is important that you read all of your IRS mail carefully to understand what your options are and avoid a tax lien being placed.
What Is A Tax Lien?
Tax liens allow the government to place a legal claim over an individual’s assets in the case that they need to seize the assets to secure payment for the debt that is owed to them. The types of assets that can be targeted by a federal tax lien include a home, other real estate property, vehicles, and more.
Tax Lien Vs. Tax Levy
While a tax lien involves a government entity placing a legal claim over an individual or business’s assets, a tax levy is a process of the assets actually being seized to secure payment for the tax debt.
Does The IRS Report Taxpayer History To Credit Bureaus?
The Taxpayer Bill of Rights was established to protect taxpayers’ rights, which includes reporting their information to third-party credit bureaus. However, even though the IRS does not directly send taxpayer information to creditors, it is important that taxpayers understand that their tax debt will become public record in the case that the IRS files a federal tax lien, and therefore the information can be applied to their credit report.
As of 2018, the 3 major national credit bureaus, Experian, TransUnion, and EquiFax, have implemented changes that remove civil judgment records, including federal tax liens, from credit reports. While this means that credit agencies will not explicitly list tax liens on credit reports, tax lien information is still public record, so lenders and credit card companies may still obtain this knowledge.
How To Avoid A Tax Lien With The IRS Fresh Start Program?
The IRS Fresh Start Program is an initiative set forth by the IRS to help eligible taxpayers manage their tax debt during a situation where paying their full tax bill would prevent them from affording their necessary living expenses.
- Offer in Compromise: settling your tax debt for less than what was initially owed and paying the adjusted tax balance in one lump sum payment. By settling your tax debt and making one payment to resolve your tax balance, the IRS will no longer have the need to place a claim on your assets by filing a federal tax lien, so your credit score will not be affected.
- Installment Agreement: setting up a monthly payment plan agreement with the IRS in which you pay a set sum each month until the tax liability has been completely paid off. Payment plans can help you avoid being issued a federal tax lien as the IRS can see you are actively working toward reducing your tax debt and not avoiding the responsibility of paying your tax liability.
- Currently Non-Collectible Status: having your tax account flagged as “currently non-collectible,” so the IRS cannot pursue collection tactics, such as filing a federal tax lien, until the status has been removed.
- Penalty Abatement: requesting your IRS penalties are removed based on your history of good tax compliance and the applicable situation being a first-time offense.
Taxpayers can approach the application process for the IRS Fresh Start Program alone, or if they want help, they can hire a tax relief professional to guide them through the application process.
Tax professionals can offer advice about how to resolve your tax issues, including providing information about local, state, and federal tax laws, answering your questions about the ways to manage unpaid back taxes, and guiding you about how to take action to avoid having undesirable tax situations showing up on your credit reports. If you want the help of an experienced tax professional to guarantee a successful outcome in your tax situation, schedule a free consultation with Ideal Tax today to learn how we can utilize our expertise to help you achieve confidence and security with your taxes.
Luis serves as the Director of Operations for Ideal Tax, overseeing a multifaceted team including case management, tax professionals, document specialists, customer support, training, and development.
