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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 debt, repay the IRS, and restore your credit score.

Does the IRS report to credit bureaus?

The IRS does not report to credit bureaus unless overdue tax debt is 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 tax debt goes unresolved and reaches past a certain threshold. You’ll always receive plenty of notice regarding your back tax debt 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 debt will negatively impact your “Payment history” and “Amounts owed”.

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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 debt is 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 debt, you likely don’t need to worry.

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What is a federal tax lien and why is it on my credit report?

A tax lien allows the IRS to make a legal claim against your property if you neglect or fail to pay tax debt. Tax liens are typically reserved for taxpayers who owe above a high threshold and they generally constitute a last resort in the collections process, as the IRS will provide plenty of opportunities to develop a repayment plan beforehand.

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You’ll be issued a Notice of Intent to Levy and receive 30 days to settle your debt before the IRS attempts to collect on your assets; if your liability is left unpaid after that time, you may be served with Form 668(Y) that confirms a tax lien has been filed against you.

If back taxes amount to $10,000 or more, the IRS is required to file an automatic Notice of Federal Tax Lien in the taxpayer’s credit file, which shows up as a derogatory mark on credit reports. This action can result in several consequences such as:

  • Negatively impacting creditworthiness
  • Making it more difficult to obtain new credit
  • Freezing existing lines of credit
  • Increasing interest rates on credit cards
  • Raising insurance premiums
  • Complicating the sale of your property
  • Impeding the ability to buy a home with taxes owed

Note: A tax lien is different than a tax levy, which allows the IRS to collect on debt with actions such as wage garnishment, property seizure, and bank account seizure.

Remember, there are many steps involved in the collections process before it escalates to this level. Let’s look at an example:

You filed a tax return and received an IRS audit that determines you did not pay your tax liability in full. You incur failure-to-pay penalties and fees on top of your outstanding tax bill. Unable to afford repaying the debt, you put this financial obligation off to the side for a while.

Interest compounds and back taxes begin piling up. If you ignore the IRS’s multiple attempts at communication regarding repayment, failure to pay back taxes can automatically trigger a tax lien that appears on your credit file.

Depending on your total liability and repayment efforts, this can severely lower your credit score—and if your score was already weak to begin with, your lenders may freeze open lines of credits or increase interest rates, making it even harder to climb out of debt. Even once the lien is paid off, it can remain in your credit history for up to seven years with lasting financial consequences.

If you find yourself falling down a similar path, it’s critical that you make arrangements with the IRS to prevent this from happening. Contact a Community Tax professional who can work with you to find a debt settlement solution that fits your needs so that back taxes do not affect your credit score.

Can you remove a tax lien from your credit report?

To remove a tax lien from your credit file, you must submit an Application to Withdraw Federal Tax Lien using IRS Form 12277. However, in order for your application to be granted, there are several steps you should take before and after filing the form.

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You’ll first need to get in touch with the IRS in order to negotiate a plan to repay the lien; it can only be removed once the tax debt is settled in full. Once it’s repaid, the IRS will automatically “release” the lien—meaning the balance will reflect as paid on your credit report. In order to have it removed completely, you must file Form 12277.

They’ll respond within 30-45 days to confirm (or deny) the withdrawal, but you’ll have to follow up with the credit bureaus afterward because the IRS will not notify them that the lien has been withdrawn.

Do IRS installment agreements affect credit?

No; agreeing to repay your tax bill on an installment plan will not affect your credit score because they are not reported to credit bureaus. Negotiating an installment agreement or an offer in compromise (OIC) with the IRS is one of the best ways to prevent tax liens, and it’s always better to start this process sooner rather than later.

It can be challenging and intimidating to negotiate with the IRS, but a Community Tax expert can work with them on your behalf. We’ll help you find the best repayment strategy possible so you can restore your good standing with the government and preserve your financial health.

How to keep taxes from impacting your credit score?

If you’re wondering whether the IRS reports to credit bureaus, you can avoid their involvement by filing and paying taxes on time. When faced with back tax debt, the debt itself won’t necessarily hurt your credit score. You’ll only start to suffer if you fail to make arrangements to repay your debt in a timely matter.

Once you discover that you’re unable to cover your tax burden on time, some repayment strategies we can help you explore include:

We know that every situation is unique, and our team will work hard to find the right fit for your specific circumstances. Don’t let owing the IRS affect your credit score and limit your financial choices in the future; contact us today to get back on track with a free consultation.

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