Does an IRS Payment Plan Hurt Your Credit?

How Does IRS payment affect my credit? A lot of Americans are financially unstable, often because of a problem with their job, some unexpected bills, or debt to the IRS.

This is a debt that is not desired by people and it affects people from all economic classes.

If you have to pay the IRS, it may seem too much and you may feel that your credit is going to take a hit. Now, the question is, how does IRS payment affect credit?

How Does IRS Payment Affect My Credit?

Making payments to the IRS doesn’t directly affect your credit.  However, there are indirect ways in which IRS payments can affect your credit:

1. Tax Liens

If you neglect to pay your taxes and the IRS files a tax lien against you, this may be shown on your credit report.

Tax liens can cause your credit score to drop considerably and such liens can remain on your credit report for up to 7 years after you have paid off the debt.

2. Payment Plan

The IRS might not directly affect your credit score, but taking a payment plan could make it more difficult to get a loan or credit card.

Certain creditors may see the IRS payment plan you are already in as an indication that you are a good credit applicant.

3. Penalties and Interest

When taxes go uncollected, the IRS can charge penalties and interest on the amount of money that is due.

While these fees will not impact your credit score, they can create a more complicated financial situation as they add to your overall debt.

4. Collection Actions

If you are not able to pay off your tax debt and it gets transferred to collections, it will hurt your credit score.

If the IRS or third-party collection agencies collect past due debts, they may be reported to credit bureaus which will consequently lower the credit score.

Does the IRS Report to Credit Bureaus?

The IRS doesn’t send your tax debt to credit bureaus directly, because it is protected by confidentiality laws that govern your tax information. 

On the other hand, if a Notice of Federal Tax Lien is filed, your debt will become a public record.

In the times earlier to April 2018, credit bureaus could show these liens on your report, but they have changed their policies since then.

While tax liens won’t appear on individuals’ credit reports anymore, lenders, landlords, and employers might still find out about them.

They can influence whether or not you can get credit cards, or loans, and they can be used by landlords or employers in ways that will not be favorable to you.

The IRS normally will hold the lien until you are either able to pay your taxes or make arrangements to pay off the debt.

How Does the Installment Agreement with the IRS Work?

If you are unable to pay the whole tax bill in one installment or if you have already missed the payment to the IRS, then a solution is there; an Installment Agreement.

Here’s how it works:

1. File Your Tax Return: First of all, file your tax return on time because even if you can’t pay the full amount you owe, do not forget to file.

2. Request a Payment Plan: After you’ve done your return filing, you can go ahead and request the Installment Agreement. This repayment plan allows you to pay your tax debt in manageable installments over time, rather than in one large amount.

3. Avoiding Late Fees and Interest: Through the Installment Agreement, you can avoid the extra fees, interest charges, and other penalties that would normally be due if you didn’t meet the payment deadline.

4. Flexible Terms: Depending on your financial situation, the IRS may give you some choices for payment. You could get a chance to choose between paying monthly, bi-weekly, or even quarterly.

5. Keep Up with Payments: It’s very important to adhere to the conditions of your Installment Agreement and be sure that you make your payments punctually.

6. Monitor Your Progress: You can check your installment payments as well as the balance remaining on your account using the IRS online system.

Advantages of the IRS Installment Agreement 

The IRS installment agreement allows taxpayers to negotiate their monthly installment amount and select the length of the plan up to 72 months.

This plan is tailored to fit the individual needs of the borrower which in turn reduces the financial burden and increases the chances of success in repayment.

Also, installment agreements have low penalties, a taxpayer has time to pay in full without additional fees, and the collection period is time-limited, thus providing a clear end to debt obligations.

Generally, it is a reasonable measure that can help to address tax debt and stay away from financial burden.

Disadvantages of the IRS Installment Agreement 

An installment agreement is a good way to resolve tax debt but it has some disadvantages.

Firstly, the debt will keep on growing with the interest and penalties only adding to the burden. The taxpayer might end up paying more than the original tax debt.

Additionally, the process of creating an agreement involves enrollment fees ranging from $43 to $225.

Lastly, putting an installment agreement in place does not stop the IRS from filing a federal tax lien, which can result in asset seizure to pay the debt.

How Paying Your Taxes Affects Credit Score

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

1. When You Pay Taxes With a Credit Card

If you pay your taxes with a credit card, you’ll incur an additional fee of nearly 2%. This fee gets added to your credit card balance along with the payment amount.

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.

2. 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 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, impact your credit score.

The credit checks associated with applying for a personal loan, known as hard inquiries, will reduce your credit score, but your score should rebound within a few months as long as you keep up with all your debt payments.

3. 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.

These plans offer relatively low-interest rates (3%), but they come with significant setup fees for long-term plans. Both long- and short-term plans impose late penalties of 0.25% of your balance each month until you fulfill your tax obligation.

While paying taxes has no direct bearing on your credit scores, using credit to cover your tax payment can affect your credit indirectly.

Failure to pay your taxes not only gets you in trouble with the IRS, it also jeopardizes your ability to get credit.

While making payments to the IRS usually doesn’t impact your credit score, neglecting tax debts or agreeing to unfavorable terms could indirectly affect your creditworthiness.

It’s essential to stay up to date with your tax obligations and collaborate with the IRS to find a manageable payment plan if you can’t pay the full amount.