Setting up a payment plan with the IRS to resolve a tax debt is a common solution for taxpayers who can’t pay what they owe in full. With flexible monthly payment options, IRS installment agreements allow people to gradually pay off their tax obligations over 6 months to several years.
However a lingering question is will an IRS payment plan show up on your credit report and impact your credit score?
The short answer is no – the IRS does not report payment plans to the credit bureaus. But IRS tax debts and liens can still affect your credit indirectly.
Let’s talk about how IRS payment agreements work, how they’re different from other debts, and why they don’t show up on your credit report.
Understanding IRS Payment Plans
You can do a few things to settle your IRS tax bill over time if you can’t pay it in full by the due date. The IRS offers a number of payment plans to fit people with a range of financial situations, including:
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Short-term payment plan: Pay off your debt in less than 120 days. No setup fee and minimal eligibility requirements.
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Long-term payment plan (installment agreement): Pay each month for a number of months or years. Fees may apply depending on your income.
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Offer in Compromise – Settle your tax debt for less than the full amount owed based on inability to pay. Strict eligibility rules.
To set up an IRS payment plan, you must have filed all required returns and supplied financial information on assets, income, and expenses. Interest and penalties continue accruing during the payment plan.
Key Differences From Other Debts
It’s important to understand IRS payment agreements are not like personal loans or credit cards. Tax debts have unique characteristics:
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Governed by federal tax law, not consumer lending laws
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Enforced by the IRS, not private creditors
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Rarely discharged in bankruptcy
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Not reported by the IRS to credit bureaus
Also, the IRS charges fixed interest rates around 5-6% APR based on federal rates. Penalties incentivize compliance, starting at 0.5% of unpaid tax per month.
These structural differences mean IRS payment plans follow separate rules from consumer credit products.
Why IRS Payment Plans Don’t Affect Credit
There are a few key reasons an IRS installment agreement won’t show up or negatively impact your credit:
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Tax privacy laws – The IRS is barred from sharing your personal tax information with third parties like credit bureaus under the Taxpayer Bill of Rights.
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Different enforcement methods – The IRS has unique collection powers, like wage garnishments, that bypass credit reporting.
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Credit accuracy – Removing tax liens from credit reports in 2018 aimed to improve accuracy.
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Incentivizing compliance – Keeping payment plans off credit reports helps incentivize resolving tax debts.
Essentially, the IRS prioritizes tax compliance and using your financial reality to structure repayment plans. Having an IRS installment agreement by itself will not appear on or hurt your credit.
When Tax Issues Can Impact Credit
Although IRS payment plans don’t affect your credit, some tax situations still can:
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Tax liens – If the IRS files a public Notice of Federal Tax Lien against you for unpaid debts, lenders may discover this lien during background checks even though it no longer appears on credit reports.
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Reporting requirements – When debts are outsourced to private collection agencies, they may report unpaid tax debts to credit bureaus.
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Missed payments – Not complying with an IRS payment plan can trigger harsh collection actions like levies, which indirectly lower your credit score.
Strategies for Protecting Your Credit
If you owe back taxes, taking proactive steps can help safeguard your credit standing:
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Act fast – Set up an IRS payment plan or hardship assistance before tax debts are sent to collections.
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Pay on time – Make all monthly payments under an IRS installment agreement on time to avoid non-compliance.
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Communicate with the IRS – If your financial situation changes, contact the IRS right away to modify payment plans before defaulting.
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Monitor credit reports – Keep an eye out for any tax liens or collection accounts that appear from unpaid IRS debts.
When to Seek Expert Help
Dealing with tax debts while protecting your finances and credit can be challenging. If you need help considering your options, specialized tax professionals can advise you on:
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Navigating IRS repayment plans and collections
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Structuring affordable payment arrangements
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Handling tax liens and leveraging tax debt relief options
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Avoiding additional penalties and interest
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Maintaining good credit standing amid tax issues
With the right tax expertise in your corner, you can resolve IRS debts in a financially responsible way while limiting credit fallout. Approach tax obligations with your eyes wide open on potential credit impacts.
Does the IRS report to credit bureaus?
The IRS does not report to credit bureaus unless overdue taxes are left unpaid. Say, for example, you file a tax return and end up owing more than you anticipated; this by itself won’t hurt your credit score. You also will not receive a positive credit score improvement in response to timely tax return paid in full, even though that may deserve some merit.
If you’ve received an IRS tax audit, then you can rest a little easier knowing that they are not automatically disclosed to the credit bureaus. But if the auditor determines that you owe money and you do nothing about it, the problem may escalate and result in IRS credit score consequences.
Essentially, the IRS only reports to the three major credit bureaus—TransUnion, Experian, and Equifax—when mounting taxes owed goes unresolved and reaches past a certain threshold. You’ll always receive plenty of notice regarding your back taxes before owing the IRS winds up hurting your credit score. We’ll take a closer look at that process in the sections that follow.
What is a federal tax lien and why is it on my credit report?
A tax lien allows the IRS to make a legal claim against your property if you neglect or fail to pay the taxes they owe. Tax liens are typically reserved for taxpayers who owe above a high threshold and they generally constitute a last resort in the collections process, as the IRS will provide plenty of opportunities to develop a repayment plan beforehand.
You’ll be issued a Notice of Intent to Levy and receive 30 days to settle your owed tax before the IRS attempts to collect on your assets; if your liability is left unpaid after that time, you may be served with Form 668(Y) that confirms a tax lien has been filed against you.
If back taxes amount to $10,000 or more, the IRS is required to file an automatic Notice of Federal Tax Lien in the taxpayer’s credit file, which shows up as a derogatory mark on credit reports. This action can result in several consequences such as:
- Negatively impacting creditworthiness
- Making it more difficult to obtain new credit
- Freezing existing lines of credit
- Increasing interest rates on credit cards
- Raising insurance premiums
- Complicating the sale of your property
- Impeding the ability to buy a home with taxes owed
Note: A tax lien is different than a tax levy, which allows the IRS to collect on owed taxes with actions such as wage garnishment, property seizure, and bank account seizure.
Remember, there are many steps involved in the collections process before it escalates to this level. Let’s look at an example:
You filed a tax return and received an IRS audit that determines you did not pay your tax liability in full. You incur failure-to-pay penalties and fees on top of your outstanding tax bill. Unable to afford repaying the owed taxes, you put this financial obligation off to the side for a while.
Interest compounds and back taxes begin piling up. If you ignore the IRS’s multiple attempts at communication regarding repayment, failure to pay back taxes can automatically trigger a tax lien that appears on your credit file.
Depending on your total liability and repayment efforts, this can severely lower your credit score—and if your score was already weak to begin with, your lenders may freeze open lines of credits or increase interest rates, making it even harder to climb out of owing money. Even once the lien is paid off, it can remain in your credit history for up to seven years with lasting financial consequences.
If you find yourself falling down a similar path, it’s critical that you make arrangements with the IRS to prevent this from happening. Contact a Community Tax professional who can work with you to find a tax settlement solution that fits your needs so that back taxes do not affect your credit score.
Do IRS Tax Payment Plans Affect Credit? – Crazy About Credit Cards
FAQ
Does an IRS payment plan affect my credit score?
Generally, entering into an IRS payment plan does not directly affect your credit score, as the IRS does not report to credit bureaus. This means that your agreement with the IRS remains separate from your credit history, allowing you to manage your tax debt without impacting your creditworthiness.
Does owing taxes affect my credit score?
Similarly, owing taxes or using an IRS payment plan doesn’t affect your credit. You might see an inquiry from the IRS on your credit report if the IRS asked you to verify your identity, you owe back taxes or you’re working for the IRS. However, the inquiries will be soft inquiries, which don’t affect your credit scores.
Does a payment plan with the IRS trigger a credit report?
Setting up a payment plan with the IRS does not cause any inquiries to be made by credit bureaus. As mentioned above, the IRS is restricted from sharing your personally identifiable information. While a Notice of Federal Tax Lien could be discoverable by lenders, the payment plan itself would not.
Will An Installment Agreement affect my credit score?
An installment agreement for tax payments with the IRS will not negatively affect your credit score. However, failing to pay your taxes or filing a late tax return can easily turn a good credit score into a bad one because the IRS can place a tax lien against you.
Does the IRS ask for a credit report?
There are several situations when the IRS might request your credit report, which can lead to a new credit inquiry. But these soft inquiries don’t affect your credit scores. Similarly, owing taxes or using an IRS payment plan doesn’t affect your credit.
Can a tax lien affect my credit score?
This means that your agreement with the IRS remains separate from your credit history, allowing you to manage your tax debt without impacting your creditworthiness. However, if you default on the agreement and the IRS files a tax lien, it could impact your credit score.
What are the disadvantages of an IRS payment plan?
Here are the main disadvantages of IRS Installment Agreements: Throughout the duration of your Installment Agreement, any outstanding debt will continue to accrue penalties and interest for unpaid taxes on a monthly basis.
Do IRS payment plans hurt your credit?
Setting up a payment plan with the IRS does not cause any inquiries to be made by credit bureaus.
Does owing the IRS lower your credit score?
Your taxes, tax liens or debts won’t be included in your credit history. However, the IRS may send your tax debt to a collections agency. This can hurt your credit score because collection is a bad mark.
Does IRS payment show up on credit report?
Does the IRS report to credit bureaus? The IRS does not report to credit bureaus unless overdue taxes are left unpaid. Say, for example, you file a tax return and end up owing more than you anticipated; this by itself won’t hurt your credit score.