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Can Unpaid Taxes Affect Your Credit?

Written by: Kristy Welsh

Last Updated: August 17, 2017

"In this world nothing can be said to be certain, except death and taxes." ~ Benjamin Franklin 

No one likes to talk about taxes, or death, but both are an inevitable part of life. A topic that comes up pretty frequently in our discussion forum is whether or not owing money to the IRS will affect your credit and if it will show up on your credit reports. While the mere fact you owe the IRS money isn't automatically reported to the credit reporting agencies, a tax lien is. Let's address the elephant in the room and get to the bottom of this tax situation. If you owe the IRS money, will it show up on your credit report, and if it does, how can you get rid of it.

Will Unpaid Taxes Affect Your Credit Score?

Owing the IRS money in and of itself will not affect your credit. In fact, if you owe them money, that fact is not automatically shared with the credit reporting agencies. The caveat to that is if you owe the IRS $10,000 or more, the IRS will automatically file a Notice of Federal Tax Lien, which will appear on your credit reports as a serious negative item. State and/or local taxing authorities may also file tax liens.

Once the IRS has filed a Notice of Federal Tax Lien against you, it may limit your ability to get a credit card, loan or other types of new credit. And even if you file for bankruptcy, your tax lien may continue — although some tax debts can be discharged — or erased in bankruptcy.

How to Remove a Tax Lien From Your Credit Report

If you ask this question of the IRS, they will tell you the only way to remove a tax lien from your credit report is to pay your debt in full. Once you do, the IRS will release your lien within 30 days after you make a full payment.

Having a tax lien on your credit is a serious negative item, as bad as a repossession or a judgment, and it can remain on your credit report for seven years even after the tax bill is paid, unless you take the necessary steps to have it withdrawn. The IRS will withdraw a tax lien when a taxpayer enters into a Direct Debit Installment Agreement. So, once you pay off your lien OR enter into an installment agreement, contact the IRS and file Form 12277. This will get the lien withdrawn from your credit reports.

How to Avoid Tax Liens

Seems pretty obvious doesn't it? Pay your taxes. Sometimes that is easier said than done — right? There are lots of different reasons why someone might not pay their taxes but the number one reason — the person does not have the money to pay the taxes in full when they file their tax return. If you run into this situation, the best thing to do is to call the IRS and set up a payment plan or agree to some type of installment agreement.

Paying your tax bill via installment agreement will not affect your credit because installment agreements are not reported to the credit reporting bureaus.

Another way to pay your taxes in full is to pay them using a credit card (if your credit line is high enough). Be careful using this method of payment because doing so could hurt your credit in a couple of different ways. First off, charging up to a card's limit will hurt your credit utilization ratio, which accounts for 30 percent of a credit score. Secondly, if you should struggle with your card payments and fall behind by 30 days or more, your credit score will drop even further as late payments are reported to the credit bureaus.

No one likes owing the IRS money, let alone a large enough amount that you can not pay it all at once. To avoid owing too much at tax time, make sure you are getting enough money in taxes taken out during the year. If you do find yourself owing the IRS more than you can pay, call them to make installment payment arrangements. The last thing you want to do is to ignore the tax bill only to be surprised with a tax lien showing up on your credit report. As always, the advice and guidance from a competent tax attorney is always a good idea. Death and Taxes — at least one of them you can control.