How Tax Debt Can Still Affect Your Credit
Tax debt can still reach your credit in two ways.
Federal Tax Liens
A tax lien is the government’s legal claim against your property when you don’t pay a tax debt. Under the rules for federal tax liens, a lien arises when you miss the deadline on an IRS bill called a Notice and Demand for Payment. The IRS can then file a public Notice of Federal Tax Lien to alert creditors, which may limit your ability to get credit.
Tax liens no longer show up on reports from the three major credit bureaus. A CFPB credit trends report found that bankruptcies are now the only public record on those reports. Some smaller reporting companies may still give lien data to lenders.
If a lien is filed, two IRS options can help. A withdrawal removes the public notice, but you still owe the tax. A subordination may make it easier to get a loan or mortgage.
Paying With a Credit Card or Loan
You can pay the IRS by card, but payment processors charge card payment fees of about 1.75%–1.85% for credit cards. A large tax charge can also raise your credit utilization, the share of your available credit you’re using. Higher utilization can lower your scores until you pay the card down.
A loan used to pay taxes is new debt. Late payments on that loan can show up on your credit reports.
Ways to Handle a Tax Bill You Can’t Pay
If you can’t pay in full, an IRS payment plan lets you pay over time. An installment agreement is a long-term plan where you make monthly payments to the IRS. Sticking to an approved payment plan can help you avoid trouble getting loans later.
| Plan | Who can apply online | Setup fee |
|---|---|---|
| Short-term payment plan | You can pay in 180 days or less and owe less than $100,000 in combined tax, penalties and interest | $0 |
| Long-term plan (installment agreement) | You owe $50,000 or less and have filed all required returns | $29 online with direct debit or $69 without; $107 or $178by phone, mail or in person; reduced or waived for low-income filers |
Before you apply, learn how IRS payment plans work and whether you can set up an installment agreement.
Costs of Leaving Taxes Unpaid
Your credit scores may stay intact, but your balance keeps growing. The failure-to-pay penalty is 0.5% of your unpaid tax for each month or part of a month, up to 25%. If you filed on time and have an approved payment plan, it drops to 0.25% a month.
IRS interest charges also accrue daily on unpaid amounts, including penalties, and the rate may change each quarter. If you don’t pay or set up a plan, the IRS may file a lien, issue a levy or do both.
Sources
- IRS, Understanding a Federal Tax Lien
- Consumer Financial Protection Bureau, Quarterly Consumer Credit Trends: Public Records
- IRS, Pay Your Taxes by Debit or Credit Card or Digital Wallet
- IRS, Payment Plans; Installment Agreements
- IRS, Failure to Pay Penalty
- IRS, Interest
