From collections letters to sleepless nights, tax debt comes with plenty of problems. If you owe the Internal Revenue Service a substantial amount of money, you might wonder if your unpaid tax debt can hurt your credit score.
The short answer is: No. The IRS does not report unpaid taxes to the three major U.S. credit bureaus, Experian, TransUnion, or Equifax, so tax debt won’t directly reduce your credit score.
But you might see other financial ramifications if you don’t pay your taxes and they could extend to your credit score or ability to open a new credit card or secure a loan. Let’s break down the rules and the ramifications of unpaid taxes, offers in compromise, and installment plans on your credit rating.
But first, a bit about the basics of credit reporting, your FICO credit score, and what it means to your financial well-being.
What Is a FICO Score?
Your FICO credit score is a three-digit number ranging from 300 to 850, based on various personal finance factors. Your credit score is determined by your:
- Payment history (on-time payments)
- Credit utilization (ratio of how much you owe to your credit limits on revolving debt)
- Length of credit history
- Types of accounts
- Recent credit inquiries
Lenders use your credit score, along with the information in your credit report, to determine if you’re a good credit risk. Will you pay back the money you owe?
What Is a Good FICO Credit Score?
Most lenders consider a score of 670 to 739 as “good,” which means you may qualify for loans and credit cards, although you may not get the best interest rates. A score of 740 to 799 is classified as “very good.” You may qualify for top-tier credit cards and secure lower rates on loans. A score of 800 and above is “exceptional.”
On the other hand, a score of 580 to 669 is considered “fair.” It might be difficult to get a loan or a credit card with a low interest rate. A score of 300 to 579 usually means you have a bankruptcy in your history, and/or multiple late payments and accounts in collections.
But the good news is that taxes you owe do not count toward your overall debt in credit score calculations. Tax debt also won’t create derogatory marks in your credit file in most cases.
Does An IRS Payment Plan Affect Credit?
The IRS does not report your tax debt, unfiled taxes, or late payments to the credit bureaus. That means late payments on an installment agreement won’t hurt your credit score.
That also means that if you set up a payment plan with the IRS, your on-time payments won’t boost your credit score.
Of course, you should still make timely payments to the IRS to pay off your tax debt. The IRS interest rate is much lower than most credit cards. It’s easy to set up ACH Direct Debit payments to have the funds automatically deducted from your bank account.
If your credit score meets the lender’s requirements, having an IRS payment plan shouldn’t affect your ability to open a credit card, buy a home with a mortgage, refinance your house, or apply for a loan.
Do Tax Liens Show on Credit Report?
As of 2018, the credit reporting bureaus do not show tax liens on your credit report. Tax liens also won’t affect your credit score, since your score is derived from information within your credit report. When this rule went into effect, many Americans saw their FICO credit score jump as much as 30 points, according to reporting from CNBC.com.
However, tax liens may show up on public records. If a potential lender looks for the information, they may find you have a tax lien on your property and refuse to give you a loan. That’s not always the case, though. If your credit is good, it’s possible to secure a loan even with a tax lien or levy.
How Tax Debt Can Affect Your Credit
Just because IRS tax debt doesn’t directly hurt your credit score doesn’t mean you can ignore it. Unpaid tax debt has severe negative consequences, including added penalties and interest. Failing to file or pay your taxes can end in wage garnishment or even jail time.
Plus, it can be hard to maintain good credit if you face financial hardship caused by unpaid tax debt.
Tax Debt Causing Financial Hardship
If you’re facing unpaid tax debt, you may have other financial problems, as well. Your installment agreements may be too high for you to maintain your current standard of living.
If you can’t afford your IRS payments without financial hardship, you might consider applying for an offer-in-compromise instead. An offer-in-compromise can substantially reduce the amount of back taxes you owe.
You should also apply for penalty abatement to reduce your tax bill and make those monthly payments easier to manage.
High Credit Card or Loan Balances Caused by Tax Debt
Taxpayers sometimes see a large tax bill and panic. They will do anything to pay off their tax debt as quickly as possible. While paying your taxes on time is usually the best thing to do, don’t rush to pay your taxes with a credit card or take out a personal loan at a high-interest rate.
You can apply for an IRS installment agreement and pay off your tax debt over time at an interest rate of just 0.25%. That’s a fraction of today’s average credit card rate of nearly 23%. Plus, if you set up an IRS payment plan, you’ll have up to 72 months to pay off your debt, which can make the monthly payments manageable.
Even if you qualified for a credit card with a 0% introductory APR, you’d have 24 months (at most) to pay off the balance before facing interest charges.
Bottom Line
Unpaid tax debt can cause significant stress and financial hardship. Tax debt or unfiled tax returns won’t directly affect your credit score, but it’s still best to pay your taxes before penalties and interest get out of control.
Seek help from Alleviate Tax as your first step toward freedom from tax debt.
FAQ
Does IRS payment plan affect credit score?
No, an IRS payment plan will not affect your credit score since the IRS doesn’t report taxpayer information to the three major credit bureaus.
Do late taxes affect credit score?
If you’re wondering does filing taxes late affect credit score, it doesn’t. The IRS doesn’t report to the major U.S. credit bureaus. But unfiled taxes can cause stress and financial hardship, so you want to make sure to file and pay your taxes on time.
Can IRS private collection agency report to credit bureaus?
Yes. If the IRS hires a private collection agency to collect unpaid tax debt, the private agency may report your unpaid tax debt to the U.S. credit bureaus, Experian, Equifax, and TransUnion.
