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Will an IRS Debt Collection Appear on Your Credit Report?

Will an IRS Debt Collection Appear on Your Credit Report?

Suppose you have tax debts this year. It is less than ideal - if you're struggling to pay off your tax debt, as it can have a lasting impact on your finances. But does tax debt affect your credit score? And does an IRS collection go to your credit report?

The Internal Revenue Service does not report directly to the credit bureaus. No tax lien will appear on your credit file. But that doesn't mean your taxes won't affect your credit score. Read on to find out more about how federal taxes and credit may be related and if debt collection will appear on your credit report.


Does IRS collection go to your credit report?

The IRS does not report information about taxes due, when or how you pay them, or if you are in collection with credit bureaus. Indeed, the Taxpayer Bill of Rights includes the right to privacy and confidentiality. This means that, in many cases, your tax information is not in the public domain.

What does it mean?

  • Paying tax bills, on time or otherwise, generally does not affect your credit positively or negatively.

  • If you are late with your taxes, the IRS will not report this information to credit reporting agencies.

  • Usually, the IRS does not report your debt to the credit reporting agencies.


Does IRS debt show up on your credit report?

Before April 2018, federal tax debt may appear on your credit report differently. If the Internal Revenue Service files a tax lien against you for taxes owed, the information becomes a public record and is true for most liens.

Credit reports used to include information about lien. In April 2018, credit bureaus changed the way certain public records were managed, including liens. This included the removal of all tax liens from credit reports.

What does it mean?

  • Tax liens will not appear on your credit report, so tax information will probably never appear.

  • However, this is due to a change in credit agency policy, and it can always be reversed if things change.

  • Tax liens remain public records, so creditors or others can find out if they look.


How do taxes affect your credit score?

Just because your liens aren't on your credit report doesn't mean they won't affect your credit score. If you are late with your taxes or have to pay high taxes, it can affect your overall finances. This, in turn, can negatively affect your credit score. Here are some ways this can happen:

Prioritizing tax debt over other debts

In the worst case, you could make payments for tax debt instead of payments due for a mortgage, car loan, or other debt. If you do this for several months, you risk serious problems like foreclosure or repossession. Even if you only do it for a month or two, you may have overdue payments on your credit report, which is detrimental to your score.

You may be paying taxes in less severe cases while making on-time payments for other debts. But you may not be paying off your debt balance quickly because you prioritize your tax debt. This can result in a more increased credit utilization rate for a longer period, which can affect your credit score.


Using revolving credit to pay taxes

If you don't start with a large balance on your credit card account, consider using them to pay your taxes. It is a way to relieve the stress of a possible tax burden. For many people, spending on the interest associated with paying off credit card debt is better than facing the consequences from the IRS.

But this option affects your credit score. Your credit utilization rate will increase if you maximize or increase your credit card balance to meet your tax obligations. Using credit is responsible for about 30% of your credit score, which can impact your credit report!


Taking out a loan to pay your taxes

Instead of revolving credit, you can use an installment loan to pay off some tax debts. This new debt will impact your credit whether you're applying for an unsecured personal loan or a home loan. First of all, a lot of research may be needed to evaluate your loan. Difficult inquiries can affect your credit score.

Then there's the fact that you have a new account on your credit score. This may also temporarily lower your score if the overall age of your credit changes.


It is important to address taxes promptly.

Tax debt doesn't magically go away, and the impact on your life and finances can increase the more you ignore the problem. If you owe taxes, make a plan to pay them off as soon as possible.

Does filing my taxes late affect my credit score? Not directly, but it can lead to all the issues discussed above. Don't stop filing if you know you'll owe taxes because you can't pay. The interest on the tax debt is generally lower than the penalties for failure to file the tax return on time. You can also contact the IRS to establish installment plans or other payment methods for large tax bills.

It's also good to understand how other debts could affect your taxes. For example, if a lender forgives your debt and sends you a 1099C debt settlement, you may have to pay taxes for that amount.

Learning how to pay your taxes on your own and having an advance in the process each year can be a good idea to anticipate your tax debt. If in doubt, consider consulting a tax or financial professional to help you develop the right plan for you.


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