March 26th, 2013

Credit Q&A Series: Taxes and Your Credit Score

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Taxes and Your Credit Score

We are back with another Credit Q&A Series post… and one just in time for tax season! As we have mentioned before, our CEO and founder Ken Lin continues to make weekly appearances on the Ed Shultz Radio Talk Show. Ken uses his expertise to help educate Ed’s listeners on the impact credit scores have on consumers’ overall financial health. Today’s question tackles paying the tax man on time.

Listener Question

“Can not paying the IRS affect your credit score? Does the IRS report to the credit bureaus? ”

Ken’s Answer

There is no firm yes or no answer for this specific question. It really depends on how much you owe and how late your payment is.

First off, your credit score is only affected if and when the IRS files a notice of a Federal Tax Lien in the court. A tax lien gives the government legal claim of your property when you neglect to pay your tax debt. This happens once the amount owed to the IRS exceeds a certain threshold or it hasn’t been paid in a timely fashion. When a federal tax lien is placed on your credit report, it will remain until it is paid off in full. When you owe money to the government, that debt is never forgiven, as other debt can be. Here are three things you can do to avoid a tax lien all together:

  1. Paying your taxes on time and in full is the best way to prevent a tax lien in the first place.
  2. If you can’t pay in full, ask the IRS about setting up a payment plan. There are two different types of plans: a guaranteed installment agreement if your outstanding balance is less than $10,000 and a streamlined installment agreement if your balance is $25,000 or less. If you owe more than $25,000, you must first pay down your balance. Then, streamlined installments can be set up.
  3. You can also apply for an Offer in Compromise. This allows you to settle your tax debt for less than what you owe. This is possible if you can prove paying your taxes in full would create a financial hardship. In order to even apply you must be current with all filling and payment requirements.

Remember… the IRS will give you plenty of notices before your lack of payments are reported on your credit report. Don’t ignore them! Any of the options above will help keep a federal tax lien at bay. Check out the IRS’ website to learn more about tax liens.

Amy

Amy Leone is the Public Relations Coordinator at Credit Karma. Before joining the team in June 2012 she spent most of her career as a TV news producer. When she’s not helping promote Credit Karma on a variety of media outlets, she’s probably out running or exploring her new state of California.

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