Does Owing Taxes Affect Your Credit Score?

Owing taxes to the IRS should have little to no direct impact on your credit score. But you’re not imagining things if you thought otherwise: Up until recently, unpaid taxes were a big deal on your credit reports, but that changed in 2018 after the major credit bureaus removed tax liens from their reporting criteria.

That doesn't mean having unpaid taxes has no bearing on your credit whatsoever. Failing to pay your taxes in time or in full could still affect your credit score in other, indirect ways.

If you're not sure how to track your credit in the first place, financial products like MoneyLion’s Credit Builder Plus membership allows you to monitor your credit score 24/7.  

The Short Answer: Owing Taxes Doesn't Directly Hurt Your Credit

The IRS doesn't report tax balances to any of the credit bureaus, so any tax debt you have won't directly impact your credit. 

By law, disclosure of federal tax information is only allowed in limited circumstances, and credit reporting is not one of those situations. However, in certain tax situations, like when you have a very large balance that's past due, the IRS can file a tax lien in order to retrieve outstanding funds, and those liens will become public records. 

When Can Unpaid Taxes Affect Your Credit?

While unpaid taxes won't appear on your credit report, certain consequences of not paying your taxes can. The key here is that taxes don't impact your credit immediately in these situations — that will happen as a result of issues that will escalate first.

1. An Old Tax Lien Is Present on Your Credit Report

Prior to 2018, tax liens appeared on credit reports, but those records should no longer show up. If, for any reason, a tax lien still appears on your credit report, you can dispute the item as an error. 

If you owe taxes from years prior or you're unable to pay your upcoming taxes in full, it's wise to monitor the impact on your credit while you work to pay your taxes. Try these:

• Get a free copy of your credit report from one of the three major credit bureaus at Annualcreditreport.com.

• Keep tabs on your financial health by regularly monitoring your credit score whether or not you have unpaid taxes. 

2. You Have a Current Tax Lien That Impacts Your Borrowing Ability

If you owe a large amount of money and the IRS takes action, it could choose to file a Notice of Federal Tax Lien in court. Then, if you apply for a car loan or a mortgage, due diligence will not end with the credit report.

Lenders will also check your public records, and if you have a tax lien, it could become harder for you to get approved for a loan.

3. Increased Debt Indirectly Hurts Your Score

When you have back taxes, you're going to feel more pressure to meet payment deadlines. If you miss deadlines because you can't afford to make the payments, you may end up paying more, as penalties and interest will start to pile up over time. 

You may have to overextend your finances to make up for the fees you've accrued as a result of delaying your payments, which can lead to debt in other parts of your life. This continues the cycle of debt, making it hard for you to pay back everything you owe. 

It's common for people to charge their unpaid taxes to their credit cards or secure a loan to pay off their outstanding taxes. While this can help you in the moment, it will result in a higher credit utilization status, which can further lower your credit score. 

4. You're Forced To Declare Bankruptcy

When making tax payments becomes too difficult, you'll have the option to file for bankruptcy. If you proceed to file for bankruptcy, you will get debt relief, but your credit score could suffer because bankruptcies remain on your record for up to seven years.

Tax Liens and What They Mean Today

When you owe more than $10,000 in unpaid taxes, the IRS could file a tax lien as a legal claim against your assets. You can avoid a lien by paying your taxes in full or by entering a payment arrangement with the IRS. 

While most tax liens no longer appear on consumer credit reports, they still have other consequences. If you’re looking to get a new credit card or take out a loan, lenders will see any tax liens against you in the public record. They may not want to take on the risk of lending to someone with a record of not paying off existing debt.

While you can charge your taxes to your credit card, it's more convenient to get a personal loan with lower interest rates. Consider the MoneyLion Credit Builder program and take advantage of the benefits it offers to borrow money while building your credit score.

If your funds won't arrive until after your tax deadline, try MoneyLion Instacash^® to access 0% interest cash advances to help you make on-time tax payments. Remember that it isn't a loan, but it can let you access a portion of your pay early once you qualify.

Collections and Related Debts

The IRS doesn't operate like a typical creditor, which means it won't send your federal tax debt to a third-party collection agency that then reports to the credit bureaus. So the direct path from unpaid taxes to a collections entry on your credit report doesn't really exist.

That said, related debts can follow a different path. State tax agencies sometimes do refer unpaid balances to collection agencies, and those accounts can end up on your credit report. The same is true for tax preparation financing, refund advance loans, or any other credit product you used around tax time. If those balances go unpaid, the lender or servicer may send them to collections, and that's when your credit will take a hit.

For example, if you took out a refund advance through a tax prep service and couldn't repay it, that debt could eventually be sold to a collections agency and appear on your credit report, even though the original obligation was tied to your taxes.

Can Back Taxes Affect Your Ability to Get a Loan?

Simply owing taxes won't impact your ability to take out a loan. But if the IRS has a tax lien against you, potential lenders will be able to see that, and it could impact their decision on whether or not to loan you money.

When evaluating your application for a personal loan, mortgage or line of credit, lenders look at a variety of factors, including:

• Active liens

• Existing payment plans

• Cash flow strain, as represented by factors like your credit utilization ratio and debt-to-income ratio

So while your credit report and score may look okay, owing back taxes can still present obstacles when you’re looking to borrow money.

Does an IRS Payment Plan Affect Your Credit?

The IRS offers installment plans for paying off tax debt, and this could be a worthwhile alternative to paying for your taxes with a credit card or paying taxes with a personal loan. Proactively reaching out to the IRS about a payment plan if you can't stay on top of your tax payments can help protect you from escalation, such as a tax lien.

Your specific tax situation will impact the specific installment options available to you, but generally IRS payment plans are either full payment, short term — paying in 180 days or less — or a monthly long-term agreement. You'll pay an interest rate that the IRS adjusts quarterly, but on the bright side, IRS payment plans are not considered loans, so they will not appear on your credit report. 

How To Protect Your Credit if You Owe Taxes

If you owe taxes, the best thing you can do is pay them off as soon as possible. But even if you can’t, you can protect yourself by being proactive. This means:

• Filing your return even if you can't pay in full

• Setting up an IRS payment plan early

• Avoiding charging tax debt to high-interest credit cards

• Keeping other account payments current if possible

• Monitoring your credit reports for unrelated issues

Not only will taking action help prevent the IRS from escalating collection efforts, but it will also help shield your credit score from the indirect impacts of having an outstanding tax debt.

Final Takeaway: How Owing Taxes Really Affects Your Credit Score

Owing taxes won't hurt your credit score, but ignoring the situation can create financial problems that do. 

When you owe taxes, it’s in your best interest to solve the problem right away. Work with professionals who can assist you with the process of seeking tax relief. You may be eligible for a payment plan, an installment program, an offer in compromise, or even a not collectible status. 

No matter what, the goal is to get rid of your entire tax debt as soon as you can. Sometimes, all you’ll need is the right payment solution.

If you're looking for a solution build your credit along the way too, the Credit Builder Plus membership can help with a Credit Builder Loan if you make on-time payments.^*

FAQs About Taxes and Credit Scores

Do state taxes affect your credit score?

No, state taxes usually don't directly affect your credit score because your tax payments aren’t reported to the credit bureaus. But if you owe a significant amount of state taxes, a state tax authority could file a tax lien, which becomes a public record that lenders can check. Your debt could also be sent to collections, which would damage your credit score.

Can the IRS garnish wages without affecting credit?

The IRS garnishing your wages doesn't appear directly on your credit report, but if your tax debt goes unpaid for long enough and the IRS imposes a federal tax lien, it can impact your borrowing ability. If the debt goes to private collections, it can also damage your credit.

Does filing taxes late hurt your credit?

No, filing your taxes late doesn't hurt your credit score. The IRS doesn't report tax debt or payments to the credit bureaus. That said, you may be on the hook for late payment fees with the IRS.

Do tax refunds impact credit scores?

No, tax refunds don't directly impact credit scores because they're not reported to the credit bureaus. 

Anna Yen contributed to the reporting for this article.

Sources:

• IRS. "Disclosure laws."

• Cornell Law School. "26 U.S. Code § 6103 - Confidentiality and disclosure of returns and return information."

• IRS. "Understanding a federal tax lien."

• Annualcreditreport.com. "Annual Credit Report."

• IRS. "Additional information on payment plans."

• IRS. "Quarterly interest rates."