Having unpaid taxes used to be a big deal on credit reports. However, in 2018, major credit bureaus changed how civil judgments and public records appear on credit reports. Owing taxes to the IRS should have little to no direct impact on your credit score. However, failing to pay your taxes on time or in full could still affect your credit score in indirect ways.
Let’s take a closer look at your IRS taxes and find out if owing taxes can impact your credit score.
Does the IRS report to credit bureaus?
The IRS does not report tax debts to any credit bureaus. 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, the IRS can file a tax lien in order to retrieve outstanding funds, and those liens will become public records.
4 ways unpaid taxes are hurting your credit score
Does owing taxes affect your credit score? Not directly, but back taxes can create a burden that will eventually drag your credit score down if they are not paid. Here are some ways to assess the impact of your unpaid taxes.
1. Check your credit
If you owe taxes from years prior or you are unable to pay your upcoming taxes in full, you can monitor the impact on your credit while you work to pay your taxes. First, get a free copy of your credit report from one of the three major credit bureaus.
To keep tabs on your financial health, you should regularly monitor your credit score regardless of whether or not you have unpaid taxes. Prior to 2018, tax liens appeared on credit reports, but those records should no longer appear to date.
If a tax lien is present on your credit report, you can dispute the item as an error. If you’re not sure how to monitor your credit score in the first place, financial products like MoneyLion’s Credit Builder Plus membership program allows you to monitor your credit score 24/7.
2. Increases the risk of defaulting on current obligations
When you have back taxes, you are 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, too. 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.
3. Tax liens make it harder to get a loan
If you owe a large amount of money and the IRS takes action, the Internal Revenue Service could choose to file a Notice of Federal Tax Lien in court. When 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.
4. You might be forced to file for bankruptcy
When making tax payments becomes too difficult, you’ll have the option to file for bankruptcy. If you proceed to file for bankruptcy, your credit score could suffer because bankruptcies remain on your record for up to seven years.
How tax bill payment methods impact your credit score
When you ask the question, “Do back taxes affect your credit?” you might only be thinking about the direct impact. In reality, the way you pay your taxes will have a significant impact on your credit score. When handled poorly, a delinquent payment history could tank your credit score.
The IRS accepts credit card payments through third-party companies. When making payments with a credit card, you’ll have to pay a service fee of 2% or so. While credit card payments are convenient, the service fees can counteract the convenience factor altogether.
These additional charges can pile up quickly, especially if you don’t pay the full amount before your next billing cycle. Putting a lot of expenses on your credit card will also increase your credit utilization, and if you reach a utilization of 30% or more, then you’ll have a high debt-to-income ratio, which could lower your credit score furthermore.
You’ll also have the option of securing a personal loan to cover your tax bill. Personal loans tend to have lower rates than credit card companies, which is a perk.
However, lenders might perform a hard credit check when you apply for a loan, which can cause a slight reduction in your credit score due to the nature of hard credit checks. But that doesn’t have to always be the case!
Some lenders, like MoneyLion, do not perform hard credit checks for financing options, such as the Credit Builder Plus loan. In fact, loans like this can even improve your credit score if you meet all of your payment deadlines.
For individuals who need help paying their outstanding taxes, personal loans could increase their credit scores by adding to their credit mixes. But when you pay your taxes by taking out a personal loan, your credit score will drop again.
IRS installment agreements
If you don’t like the idea of paying for your taxes with a credit card or a personal loan, you can apply for an installment agreement with the IRS. The IRS offers a 120-day payment plan. You can ask for an extension, but the 3% interest will continue to run. On the bright side, IRS payment plans are not considered loans, so they will not appear on your credit report.
Can I avoid tax liens?
When you owe more than $10,000 in unpaid taxes, the IRS could file a tax lien against your properties. You can avoid a lien by paying your taxes in full or by entering a payment arrangement with the IRS.
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 SM to access 0% APR cash advances so that you can make on-time tax payments.
Deal with tax debts the right way
Do back taxes affect your credit? No, but when you owe taxes, it is 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. Sign up for a membership to access the MoneyLion Credit Builder loan or get a cash advance through Instacash. Both options can help you make on-time tax payments and hold you over until your next paycheck!