If the IRS audits you and finds you underpaid your taxes, the taxes themselves (along with any penalties and fees) don’t immediately impact your credit score, but how you pay that debt can cause those numbers to drop. How much you owe and how you choose to pay both impact your ability to borrow money in the future. Though the good news is that, as much as IRS debt takes priority, IRS may be more willing to work with you than other creditors, so if you make payments in a timely manner, you can protect your financial reputation.
IRS Payment Plans
People often work out an installment agreement with the IRS. If you do, the amount you owe doesn’t go on your credit. As long as you make payments as agreed, it won’t affect your credit like a loan or credit card might.
How Tax Debt Can Affect Credit
If you can’t pay your bill, especially if your total is more than $10,000, the IRS may issue a tax lien, which gives the government a claim against your house, your vehicles and anything else you own. Therefore, you won’t be able to sell any of those items until you pay your debt in full.
Beyond effectively freezing your assets, a tax lien negatively impacts your credit and can stay on your report for up to seven years—even if you pay off your liability.
Furthermore, people sometimes choose to file for bankruptcy when they find themselves struggling under a mountain of tax debt, but that, too, affects credit, for between seven and ten years.
Personal Loans and Credit Cards
If you end up with a tax bill that’s larger than you expect and you decide you need a personal or business loan to make payments, this is an indirect way that the IRS debt can affect your credit: The amount you borrow will affect your debt-to-income ratio and that can lower your credit score.
Similarly, if you have a high limit on your credit card or line of credit, you might choose to use that credit to pay off your bill. However, when you owe close to the maximum amount you qualify for, it may affect your ability to qualify for a home mortgage or auto loan.
What You Can Do
If you find yourself facing a large tax debt, it’s always best to contact a professional. They can help you face the IRS and resolve the debt while protecting your credit and your finances.
If you’re dealing with an IRS audit or an IRS tax bill, Highland Tax Group can help: Contact us to receive expert advice today.