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Tax Debt and Your Credit Score

Finding out that you owe the Internal Revenue Service (IRS) can be stressful and overwhelming, especially if you can’t pay your taxes in full. You may be wondering how this will impact your credit score. Thankfully, tax debt and your credit score are not directly linked. This, however, does not mean that your credit score is immune from other consequences related to your unpaid tax debt.

What Happens to Your Credit When You Have Unpaid Taxes?

There are three major credit bureaus: Experian, TransUnion, Equifax. Each creates a credit score that is calculated based on several factors. This includes your repayment history for loans and credit cards, as well as foreclosures, bankruptcies, and other legal proceedings. Whether you pay or don’t pay your taxes, however, is not factored into your score.

Will a Tax Lien Affect My Credit Score?

If you fail to pay your taxes, the IRS may place a tax lien against your property. Prior to April 2018, this negative action would be included in your credit report, but this is no longer the case. Your credit score will not be affected by a tax lien. Although the credit bureaus no longer include these in the reports, a tax lien could impact your ability to secure a mortgage or other loan. Lenders typically conduct a public records search during the application process. If you have a tax lien, it could result in your loan being denied.

How You Pay Your Tax Debt May Affect Your Credit Score

Not paying your taxes can have serious consequences, such as tax liens, levies, and wage garnishment. You will also face penalties and interest for any unpaid tax debt. To avoid these potential problems, you may consider paying your taxes with alternate funding. Using a credit card or personal loan may seem like an easy fix, but these forms of payment will impact your credit score.  

Paying Taxes With Credit Cards

Before you decide to use a credit card to pay off your taxes, ask yourself these three important questions:

  • Can I pay off the balance quickly?
  • What is the interest rate on the unpaid balance?
  • Will the amount exceed 30% of the available borrowing limit?

Keep in mind that the IRS imposes a 2% fee when using a credit card to pay your tax debt. If you can’t pay off your credit card bill within one cycle, interest fees from your card will also start to accrue. When that balance exceeds 30% of your borrowing limit, your credit score will likely decline. Don’t forget that any missing or late payments will also negatively affect your credit score.

Paying Taxes With a Personal Loan

Personal loans typically offer better interest rates than credit cards. They also provided a set payment schedule which can be easier to manage. Although your credit score may take a minor dip due to the credit checks involved with applying for a personal loan, it should rebound quickly. Just be sure to make your payments on time. If you have a tax lien against you, unfortunately, your chances of approval may be pretty slim.

Other Options for Paying Tax Debt and Your Credit Score

The IRS offers several solutions for handling your tax debt, including Offer in Compromise and installment agreements. Depending on the amount you owe, you may be able to qualify for a short-term or long-term payment plan. Although there are setup fees and interest, IRS payment plans are not considered loans. This means they are not included in your credit report.  If you negotiate your tax debt through an Offer in Compromise, you’ll need to pay the $205 application fee, as well as the initial payment (20% of the total offer amount). You can also request to make periodic payments for the remaining balance. An Offer in Compromise will not be reported to the credit bureaus and does not affect your credit score.

Carefully Consider Your Tax Repayment Options

If you’re facing a tax bill that you can’t pay, carefully consider all your options and their consequences before you make a decision.  At Tax Defense Network, we can help you set up an installment agreement, see if you qualify for an Offer in Compromise,  and help restore your credit score. To learn more about our affordable tax relief options, schedule a free consultation today!