How Does Tax Debt Affect Your Credit Score?

How Does Tax Debt Affect Your Credit Score?

• Oct 29, 2022

Most people understand that unpaid debt can have a negative impact on your credit score, but different debts have different impacts. How does tax debt compare to other types of debt? How severely will it impact your credit score, and what can you do to minimize any impact it may have? Keep reading to learn more about taxes and your credit score. If you have unpaid tax debt that you need help settling, contact the IRS Advocates today for professional guidance and support.

Does the IRS Report to Credit Bureaus?

First, some good news: The IRS does not report directly to the credit bureaus, so accruing tax debt does not have a direct negative impact on your report. Your privacy and confidentiality regarding your taxes are protected by the Taxpayer Bill of Rights, so it’s actually against the law for the IRS to report your unpaid debt to any credit bureaus.

What does this mean for you? If you have recently accumulated tax debt that you’ve been unable to pay, and that debt has not progressed to collection actions, then it isn’t currently impacting your credit score. However, that doesn’t mean it will stay that way. As things progress, there’s a higher chance that your tax debt will drag down that number on your credit report.

What If You Have a Tax Lien?

Prior to April 2018, nearly all liens on your property would be recorded on your credit report, since liens are part of the public record and not covered by the Taxpayer Bill of Rights. This meant that any tax liens placed on your property by the IRS would impact your credit score. However, in April 2018, the credit reporting agencies altered how they dealt with certain public records, including liens, and this included removing all tax liens from credit reports.

For you, that means new tax liens won’t show up on your credit report, but because tax liens still remain part of the public record, creditors can still find out about them if they search for this information. Additionally, bear in mind that tax liens no longer impacting credit is due to a change in credit bureau policy, not changes to federal privacy laws. This means that the policy can be reversed at any time, and tax liens may once again impact your credit score.

So Does Tax Debt Impact Your Credit?

If the IRS does not report your debt to credit bureaus, and tax liens don’t show up on credit report any more, does tax debt have any impact on your credit score? The answer is both yes and no. No, your tax debt is never directly reported on your credit report. However, there are many indirect ways in which this type of debt can impact your credit. Two of the most common ones are:

1. Prioritizing tax debt over other debt – When you have multiple sources of debt, it can be difficult to appropriately manage those different debts. You may end up needing to prioritize your tax debt over other bills, and could fall behind on credit card, mortgage, or auto loan payments, which would bring down your credit score. Even if you are attempting to pay all debts at once, you may not be paying down your other debts as quickly as you were before, which can lead to a higher credit utilization ratio for longer; this can also negatively impact your credit score.
2. Taking on other debt to pay for taxes – Due to the high fees and interest rates on a tax debt, many people choose to take on other debt to pay off the IRS. Perhaps you use your credit cards, refinance your mortgage, or take out a new loan to pay for taxes. Taking on new debts that you can’t immediately pay off will almost always negatively impact your credit score. Whether you use revolving credit or an installment loan, both can cause a drop in your score, even if it’s just a temporary one.

While tax debt may not be directly included on your credit report, its impact on your financial life is nonetheless quite serious. Getting your debt settled through a tax relief program with the IRS can prevent these negative effects on your credit score. Contact the IRS Advocates today to schedule a consultation and learn how you can settle your tax debt before tax liens and other collection actions begin to take their toll on your credit and finances.