Does Owing the IRS Affect Your Credit Score?
A strong credit score is extremely important when it comes to qualifying for loans to buy a house, buy or lease a car, and accessing a line of credit whenever you need it. Whether you like it or not, ratings provided by the three major credit bureaus can really make or break your financial future. Some people feel that it’s completely unfair, but for better or worse the system is here to stay and you’re possibly concerned about how every single financial maneuver could potentially impact your score.
If you owe taxes to the Internal Revenue Service (IRS), you may wonder if this tax debt can negatively affect your credit score. As you might expect, the answer is somewhat complicated. Nothing ever really seems all that cut and dried when it comes to dealing with tax-related issues. Here is what you need to know:
Quick Facts About the IRS and Your Credit Score
- Your credit score can be impacted if you do not pay your taxes in a timely manner. However, if you file your return, but are not able to pay the full amount due right away, this alone will not automatically mean a lower credit score. Owing back taxes does not automatically translate to a lower credit score. Remember that the IRS doesn’t assign credit scores either. Several semi-private organizations oversee credit reporting, and they’re technically not even directly associated with the government anyway. As a result, the IRS can’t ever say that you deserve a lower or higher credit score. They don’t have any real power over this at all. If you’ve ever heard an IRS agent tell you that they could just cut your score in half or something like that, then there’s a good chance said individual doesn’t really work for the IRS after all.
- The amount that you owe the IRS is probably the biggest factor when determining whether your debt will impact your credit score. The only way that your credit can be impacted is if the IRS files what is called a Notice of Federal Tax Lien that gives the government the right to seize your property, including your home and your vehicles. The IRS will only do this if you owe a sizable debt and have not made efforts to pay it even after written notices. Keep in mind that you will always receive many notices before the IRS files a Notice of Federal Tax Lien. These notices will generally come via registered mail or some other official channel, so you should be able to tell a bona fide letter from one that’s phony.
- The IRS is usually willing to work with you to help resolve your tax debt. You may qualify for an installment agreement. This allows you to pay your debt over time rather than in one, large lump sum. An installment agreement is not reported to credit companies. In addition, if you truly cannot afford to pay the debt that you owe, you can apply for an Offer in Compromise, an agreement that settles your tax debt for less than you owe. It is important to understand that the IRS does not look favorably on those who neglect to file their tax returns (even if you cannot pay your debt) and will not grant relief in many cases unless your returns are current. Now, if you’ve made sure to keep all your returns current but still owe money the IRS might be a little more lenient and let you settle your debt for less than you owe overall. Even if they don’t do this, they will usually work with you to come up with something that’s at least a little better than your current situation. After all, Uncle Sam always wants to be able to walk away with at least something.
- Keep in mind that if you use a credit card to pay your tax bill or you decide to take out a personal loan for payment, your credit score can be impacted by those decisions. For example, if you use a significant chunk of your available credit, credit companies will notice and you may see a dip in your credit score because of the change to your credit utilization calculation. This might be the most common reason that taxpayers see a major drop in their credit score when dealing with a tax problem.
Strategies For Paying Your Tax Debt
Success Tax Relief can help you determine the best path forward to help resolve your tax debt. We understand that owing the IRS money can be extremely stressful and our team works to develop a unique plan for you that can help you move forward, once and for all. For more information or to speak with one of our tax relief specialists, contact us online today.
We can clearly explain how your tax debt may impact things like your credit score and help you make the best possible decision to get you out of debt, while minimizing the negative impact on your personal life. While your credit score might not come out of this situation unharmed, it’ll certainly suffer less damage than had you simply avoided the issue.