The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Not paying your taxes can seriously blemish your credit reports. That’s according to Rod Griffin, director of public education for Experian, one of the three major credit bureaus in the U.S. “Unpaid taxes can result in a tax lien,” he wrote in an email, “which will be reported on your credit report [and remain on it for up to 10 years.] Once paid, a tax lien will remain for seven years from the filing date of the lien.” Worse still, Griffin added, “your credit scores may drop significantly if a tax lien is reported, and your credit scores may be impacted while the tax lien appears.”
This is bad news for consumers who are looking for credit, be it via a credit card, mortgage, auto loan or something else. If you’ve had trouble making payments to the IRS and are concerned about the effects troubles with the IRS may have on your credit report, here’s a guide to what you need to know.
It’s important to check your credit so you know where you stand and if any tax liens have appeared on your record. You can pull your credit reports from the major credit reporting agencies for free once a year at AnnualCreditReport.com. You can also view a free snapshot of your credit report by signing up for an account on Credit.com. 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.
While the fact that you owe the IRS money isn’t automatically reported to credit reporting agencies, if you owe $10,000 or more, the IRS will automatically file a Notice of Federal Tax Lien, which will appear on your credit reports as a seriously negative item. (It is in the same category as a repossession or court judgments.) State and/or local taxing authorities may also file tax liens.
Once the IRS files a Notice of a Federal Tax Lien against you, it may limit your ability to get credit, as lenders view this as a sign you can’t manage your finances. And even if you file for bankruptcy, your tax debt and lien may continue. (Though some tax debts can be discharged – essentially “erased” – in bankruptcy.)
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, as Griffin explained, 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.
Fortunately, taxpayers may be able 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.
Once you pay off a tax lien or enter into an installment agreement, be sure to contact the IRS and request that the tax lien be withdrawn from your credit report. You can do this by filing IRS Form 12277.
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.
Jill Krasny contributed reporting.
Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.
Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.
Try ExtraCredit for free
Over $100 of value. Cancel anytime.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.