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While federal or state tax debt doesn’t show up on your credit report, it can have an impact on your credit down the line. Find out more about how tax debt impacts your credit, including your ability to pay debts and get loans, below.
In This Piece:
- Does the IRS Report to the Credit Bureaus?
- Consequences of Not Paying Your Taxes or Paying Them Late
- What to Do When You Can’t Pay Your Taxes on Time and in Full
- Do What’s Best for Your Finances
Does the IRS Report to the Credit Bureaus?
The IRS doesn’t report tax debt or payments to the credit bureaus. So, your credit won’t take a direct hit if you’re late on a tax payment. At the same time, you won’t get any sort of positive credit impact for making payments on tax bills on time.
Credit bureaus only report items that are reported to them. Creditors, such as banks and credit card companies, report account information to one, two or three of the credit bureaus. They aren’t required to report to any or all of them, which is why your credit report can be different with each major bureau. The IRS doesn’t report at all, even if you sign an agreement with them to pay off your tax debt in installment payments over time.
Tax liens, which are public records, used to show up on credit reports and seriously impact credit scores. However, in April 2018, the three major credit bureaus agreed to remove tax liens and some other types of public records from credit reports, so they no longer show up.
Consequences of Not Paying Your Taxes or Paying Them Late
If you don’t pay your taxes on time, you can incur interest, fees, and penalties. These amounts substantially drive up how much you owe in taxes, leaving you struggling financially to manage your budget. You might miss payments on other types of debt as you try to pay taxes, and those other missed payments may be reported to the credit bureaus. That can reduce your credit score.
Another tactic for paying off rising tax debt involves taking out a personal loan or using credit cards. This can increase your credit utilization ratio, which can also drive down your credit score.
Tax Liens
If you go for a period of time without paying your taxes or making arrangements with the IRS to do so, the federal government may issue a tax lien. This is true for state tax debt too.
Tax liens are assessed on property you own, such as a home or car. A lien puts the IRS or other tax agency in line to receive profits from the sale of the property in the future. For example:
Levies
Another consequence of not paying your taxes can be a levy. A levy occurs when your property is seized to cover a tax debt. Types of properties that might be levied include homes, cars, certain types of personal property and even cash in bank accounts.
Wage Garnishments
The IRS may also be able to get an order for a wage garnishment. This means a certain amount of every paycheck is paid to the IRS by your employer, reducing how much you take home.
Problems Getting a Loan
While tax debt doesn’t get reported to the credit bureaus, liens are public record. Lenders can look up public records to find out if you have any tax liens, and this can inhibit your ability to get a loan. This is especially true if you’re trying to get a mortgage. Lenders usually require that you make good on any existing tax liens before you can qualify for a mortgage.
What to Do When You Can’t Pay Your Taxes on Time and in Full
None of these consequences occur just because you can’t pay your taxes in full on April 15 of the year. The IRS has programs in place to help people pay their tax debt over time. It’s important to communicate with the IRS as soon as you know you can’t pay your tax debt so you can get an installment plan. If you’ve never had an installment plan and your tax debt is under a certain threshold, you can usually qualify automatically for a payment plan.
Do What’s Best for Your Finances
It’s important to consider your entire financial picture when making decisions about your taxes. If you owe a lot of money to the IRS, consider reaching out to a tax attorney or professional to find out if there are any relief programs you might qualify for. And keep an eye on your credit so you understand what’s impacting it and how you might improve it. Get started with ExtraCredit to see your credit reports and 28 of your FICO scores.
The post Does Not Paying Your Taxes Affect Your Credit? appeared first on Credit.com.
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