If you owe taxes to the IRS, could that affect your credit score? Maybe.
While the IRS doesn’t report owed taxes to the credit bureaus, the way you choose to pay your tax bill (or fail to pay it) could affect your credit scores and reports.
Paying Taxes with a Credit Card
If you wind up with an unexpected tax bill, you may need to use a credit card to cover your balance. Keep in mind that adding your owed taxes to your credit card balance will increase your outstanding debt, which is one of the factors that affects your credit score.
While the IRS doesn’t accept credit card payments directly, it contracts with three payment processing agencies to accept card payments. Each of the payment processors charges a percentage of your tax bill as a processing fee, so if you pay by credit card, you’ll have to pay a processing fee in addition to the amount of tax you owe.
If you want to use a credit card to pay your tax bill, review the three options at the IRS website, and choose the one that will offer the lowest fees for your card type and payment amount.
Failing to Pay Taxes
Another way that your tax bill could affect your credit is if you simply fail to pay that bill. The IRS won’t report owed taxes to the credit bureaus, but it may file a tax lien if your tax bill remains outstanding. A Notice of Federal Tax Lien means the IRS has a legal claim against all your current and future property, such as your home or vehicle.
When such a lien has been filed, your tax debt becomes public record, so it may be discoverable by lenders, employers, and others. It still won’t be reported directly to the credit bureaus, but the IRS may choose to garnish your wages or place a levy on your assets. While that action may not be reported to the credit bureaus, it will show up on your paystubs and wage statements, which could make it more difficult to get a loan or to get favorable loan terms.
If you are unable to pay your tax bill when it’s due, consider establishing a payment plan with the IRS. A payment plan, also known as an installment agreement, allows you to pay your owed taxes over time and does not trigger any reports to the credit bureaus. As long as you are continuing to make payments as agreed in your installment plan, the IRS will not place a tax lien on your assets.
What if You Get a Tax Refund?
The IRS has projected smaller tax refunds for this year, but many taxpayers will still get a refund. If you end up with a tax refund, you could use it in a way that may positively affect your credit. Consider using your refund to pay off outstanding debt, which will increase your available credit. That increase will be reported on your credit reports.
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