The IRS is one of the most powerful creditors, but can it damage your credit score if you don’t pay? Here’s what you need to know.
Tax accounts don’t appear on your credit report.
Your account balance with the IRS generally doesn’t appear on your credit report. If you still owe $2,000 from 2020, you won’t have a $2,000 line item with a creditor named IRS.
Because your tax debt doesn’t go on your credit report, it won’t affect your credit utilization ratio. It also won’t come up in most credit checks such as when you apply for credit card accounts.
This is good news if you’re looking for a loan or 0% credit card to help pay off your tax debt. Unlike existing credit card debt, which does lower your credit score, an existing IRS debt probably won’t hurt your chances of approval with a private lender.
Installment agreements don’t appear on your credit report.
Even when you take out an installment agreement, which works like a loan, the IRS won’t report your installment agreement to the credit bureaus. Your credit score won’t take a hit for a new account, high loan balance, high monthly payment, debt-to-income ratio, or other factors as it might if you had taken out a consumer loan.
Further, the IRS does not report the fact that you defaulted or made a late payment on an installment agreement. There are other things they can and will do, but tanking your credit score isn’t one of them (at least at this stage).
This makes installment agreements an attractive option if you’re working on rebuilding your credit or getting ready to take out a mortgage. However, you should be aware that underwriters may still ask for your tax records in certain situations. There is no guarantee that a lender won’t count your installment agreement as part of your credit obligations.
On the flip side, since the IRS doesn’t report tax payments, paying your taxes on time won’t help to build your credit. If you’re looking to improve your credit mix on your credit score, you might want to look into personal loans.
Tax liens no longer affect your credit score.
Tax liens used to do major damage to your credit score. Changes in consumer credit reports mean that tax liens no longer appear on your credit report with the consumer credit bureaus or affect your credit score.((https://www.experian.com/blogs/ask-experian/tax-liens-are-no-longer-a-part-of-credit-reports/))
Note that federal government liens may still appear in public records searches. That’s because a lien is a notice to other people that they can’t buy your house without the outstanding balance getting resolved.
What about IRS debts sent to private collections?
Early in 2018, the IRS launched a new Private Debt Collection program where it would send tax debts to private debt collectors. So far, the IRS has released limited information about this program.
One of the few certainties is that the private debt collectors can’t take enforcement actions such as filing a lien or levy. Because the private contractors are only helping the IRS and have less power than IRS personnel, it would seem that they can’t hurt your credit report where the IRS can’t. However, I haven’t seen any official guidance stating that they can’t report the debt to a credit bureau just like they could if they bought a private debt.
You should still resolve your IRS debt.
A big reason the IRS doesn’t report debts to credit bureaus on their own is that they don’t need to. They can add interest and penalties on their own and enforce it by taking your property, bank accounts, or wages.
On the flip side, if you work with them and make good faith efforts to resolve your debt, they’ll almost always treat you less severely than someone who ignores them. You may also be able to pay over time or to resolve the debt for less than you owe.