Not paying your taxes can put a serious black mark on your credit report if the amount you owe is large enough and a federal tax lien is filed against you.
You can check your credit each month using Credit.com's free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You'll see, for example, how your payment history, debt and other factors affect your score, and you'll get recommendations for steps you may want to consider to address problems. Checking your own credit reports and scores does not affect your credit score in any way.
The Internal Revenue Service generally issues a tax lien against taxpayers who neglect to pay tax bills of $10,000 or more.
Once the IRS files a Notice of a Federal Tax Lien against you, it may limit your ability to get credit. And even if you file for bankruptcy, your tax debt and lien may continue. So how do you get a federal tax lien removed?
According to the IRS, the best way to get rid of a federal tax lien is to pay your debt in full. Once you do, the IRS will release your lien within 30 days after you make a full payment.
Having a tax lien on your credit report is a serious negative item and it could remain on your credit report for seven years after the tax bill is paid, unless you take steps to have it withdrawn.
Negative accounts like tax liens can drag down your credit scores. If you want to see where your credit currently stands, and whether you have negative items on your credit report, you can use the Credit Report Card, a free tool that updates your scores monthly.
Once you pay off a tax lien, contact the IRS and request that the tax lien be withdrawn from your credit report.
Fortunately for taxpayers, the IRS made some changes to its tax lien policies in 2011 that make it easier for taxpayers to get lien withdrawals after resolving their tax liabilities. And, in most cases, the IRS will withdraw a tax lien when a taxpayer enters into a Direct Debit Installment Agreement.
To avoid a tax lien, pay your taxes as agreed and if you cannot pay the full amount consider other payment options such as paying by installment agreement. Paying a tax bill by installment agreement will not affect your credit because installment agreements are not reported to the credit reporting bureaus.
Charging a big tax bill on a credit card is another option, if you have a large enough credit line. But doing so could hurt your credit in a couple of different ways. First off, charging up to a card's limit will hurt your credit utilization ratio, which accounts for 30% of a credit score. And second, if you should struggle with your card payments and fall behind by 30 days or more, your credit score will drop even further as late payments are reported.