How Does IRS Payment Affect my Credit? Can Paying Tax Debt Affect Me?

How Does IRS Payment Affect my Credit? Can Paying Tax Debt Affect Me?

How Does IRS Payment Affect my Credit? Many Americans struggle financially, whether through issues with their job, unexpected bills, or obligations to the IRS. In fact, paying back taxes is an unfortunate debt that affects people across income stratus.

How Does IRS Payment Affect my Credit?

If you owe money to the IRS, it can seem overwhelming, and you may be left wondering if a payment plan to the IRS will affect your credit.

How does an Installment Agreement with the IRS work?

If you owe more in taxes than you have the means to pay upfront, or if you haven’t paid an outstanding tax bill to the IRS, then you may be eligible for an IRS payment plan.

Even if you don’t think you can pay your tax bill by the due date, you should still file your tax return on time. Then, you can request a payment plan, which will help you avoid late fees, interest, and other potential penalties.

Will an IRS Payment Plan Affect my Credit?

An installment agreement to pay your back taxes will not negatively affect your credit. However, failing to pay your taxes or filing a late tax return can easily turn a good credit score into a bad one because the IRS can place a tax lien against you. A lien can affect your ability to purchase a car or a home and will negatively impact your credit score.

While a payment plan with the IRS – in and of itself – will not negatively impact your credit, not paying what you owe the government will if/when a lien is filed, so it’s best that you act and take steps to solve your tax issue.

Does the IRS Report to Credit Bureaus?

The IRS does not report your tax debt directly to consumer credit bureaus now or in the past. In fact, laws protect your tax return information from disclosure by the IRS to third parties (according to the Taxpayer Bill of Rights).

However, once a Notice of Federal Tax Lien has been filed, your debt becomes public record. Before the credit bureaus changed their policies in April 2018, the public nature of the lien allowed it to be reported on your credit report.

Although these agencies will no longer show tax liens on credit reports, a tax lien filed against you may still be discovered by lenders, credit card companies, etc. In addition to making it difficult to get new credit cards or loans, landlords or employers also may view the tax lien, which may have its own negative effects.

The IRS generally keeps the tax lien in place until you pay your taxes in full or have made other arrangements to pay off, reduce, or eliminate the debt and the IRS releases the lien.

How Paying Your Taxes Affects Credit Score

How Paying Your Taxes Affects Credit Score

Paying your taxes still has the possibility of affecting your credit score. Here is how.

When You Pay Taxes With a Credit Card

When you pay your tax with a credit card, the amount of your payment, plus a fee of nearly 2%, will be added to the balance of the credit card(s) you use to make the payment.

When paying by credit card, keep in mind that you’ll be paying interest. Charges can add up quickly if you’re not able to pay down the balance right away. That can lead to excess credit card debt that could eventually hurt your credit score.

When You Pay Taxes With a Personal Loan

Paying your taxes with a personal loan can be a more affordable option than using a credit card since interest rates on personal loans are sometimes more affordable than credit card rates.

Using a personal loan to pay taxes requires some advance planning. You’ll need to calculate your tax obligation early enough to give yourself time to apply for and receive the loan amount before your tax payment deadline.

A personal loan and your record of making payments on it will appear as activity on your credit reports, and will, therefore, have an impact on your credit score. The credit checks associated with applying for a personal loan, known as hard inquiries, will cause a slight reduction in your credit score, but your score should rebound within a few months as long as you keep up with all your debt payments.

When You Pay Taxes With IRS Installment Agreements

The IRS offers a 120-day payment plan and longer-term plans for a negotiable number of months, depending on the amount you owe and how large you want to make the monthly payments.

Interest rates on these plans are relatively low (3%), but the long-term plans come with significant setup fees, and both long- and short-term plans charge you late penalties of 0.25% of your balance each month until you meet your tax obligation.

The Bottom Line

The Bottom Line

While paying taxes has no direct bearing on your credit scores, using credit to cover your tax payment can affect your credit indirectly, and failure to pay your taxes not only gets you in trouble with the IRS, it also jeopardizes your ability to get credit.

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