When tax season is upon us, it feels almost as if no one can escape the pressure. First, there’s the wrangling of the documents, then the decision of filing for free or paying for help, and then, finally, the wait to see if the result will be a refund or a bill. But what if your result is a bill and you don’t have the money to pay? Can not paying taxes hurt your credit in the end? Let’s find out.
Can Not Paying Taxes Hurt Your Credit?
There are many consequences that can happen if you don’t pay your taxes, starting from owing interest and fees all the way to eventually having property seized by the Internal Revenue Service (IRS). But can not paying taxes hurt your credit?
Not the way it used to.
The IRS has the option to engage with a private debt collector on unpaid taxes. If that happens, you’ll start getting calls from the debt collector — but the collections account might not show up on your credit reports. Experian’s Director of Consumer Education and Awareness, Rod Griffin, explains:
“In theory, the Internal Revenue Service could transfer your unpaid taxes to a collection agency that then could report the amount as an unpaid debt. However, they have not historically reported that debt. Whether through contractual agreement with the collection agency or through law or policy, the IRS may specify that the collection agency not report to the national credit reporting companies.”
Changing Tides on Tax Liens
Tax liens used to be a way that not paying your taxes could hurt your credit, but the tide on that is changing.
When the IRS puts a lien on your assets, they’re not taking them yet (that would be a levy and can happen later), but it’s more like the IRS putting a stake in the ground. You have something worth money, and they’re laying claim to it.
Tax liens used to show up on your credit report and stay there for 10 years. But due to the fact that some consumers saw liens on their credit reports that weren’t theirs, changes have been made to how tax liens can be reported. The Consumer Financial Protection Bureau (CFPB) explains the change:
“Starting July 1, 2017, public record data furnished to the NCRCs [Nationwide Credit Reporting Companies Equifax, Experian, TransUnion] for inclusion on credit reports had to contain name, address, and Social Security Number and/or date of birth, and had to be refreshed at least every 90 days.”
This new requirement first resulted in all tax liens and public records that didn’t match that criteria to be removed from consumers’ credit reports. Since then, the three major credit reporting bureaus have opted to not report on new tax liens for the time being. In other words, tax liens won’t hurt your credit for now. However, they’re still a public record, which means lenders can find this information on you if they go looking for it outside of your credit reports.
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What to Do If You Can’t Afford Your Tax Bill
A tax bill you weren’t expecting or can’t afford can show up pretty high on the long list of financially scary prospects. That’s not to say you’re without options, though. And the more you understand your options, the less scary this prospect has to be. Below are a few things to think about if you’ve been hit with a tax bill you can’t afford. However, you should consider speaking with a tax professional about your specific situation.
1. Request a Payment Extension
Did you know you might be able to request a payment extension to buy yourself more time to pay off a tax bill? If you can prove that paying your tax bill on time will result in undue hardship, you can fill out and mail in form 1127 to request an extension on the payment. Note that this is a payment extension request, not a request for a filing extension.
One important note the IRS includes in this form is that, “You must pay the tax before the extension runs out. Do not wait to receive a bill from the IRS.”
2. Apply for a Payment Plan
If you can’t get an extension, you might still have an option to obtain a payment plan through the IRS. The three tax payment plans generally available are:
- Short-term (120 days or less); no setup fee
- Long-term with automatic withdrawals; $31 fee to set it up if you apply online, or no fee to apply online if you qualify to have it waived due to low income
- Long-term not using automatic withdrawals; $149 feel to set it up or $43 if you qualify due to low income
If you don’t want to apply online, you can do so over the phone or by mail, but the fee on some of the plans goes up if you choose this option. Each of these plans also comes with accrued penalties and interest. You can learn more about these plans and apply here.
3. Do the Math on Using Personal Credit Products
If these options don’t work for you, or if you are considering a loan to pay off your taxes, you should compare the cost of setting up a payment plan with the option to pay your taxes bill via credit card or personal loan.
It might be more difficult to predict how much you might pay overall if you use a credit card to pay your taxes unless you qualify for a credit card with a 0% introductory APR. A personal loan, however, is easy to compare, as you’ll be given a fixed payment amount, interest rate, and payoff date.
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No matter how you look at it, paying interest on a tax bill isn’t ideal. That said, it’s a lot better than not paying your tax bill and dealing with the consequences. Out of the options available to you, it helps to choose the one that’s most cost-effective and that you feel most comfortable taking on.
4. Consider an Offer in Compromise
Just like it’s sometimes possible to settle a debt for less than you owe, you might be able to settle a tax bill for less than you owe. This process is called “offer in compromise,” and the IRS considers things like your income, assets, and expenses when determining if paying the full tax bill would cause you financial hardship.
According to the IRS, they “generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time.” The IRS goes on to say, however, that this should be a consideration after you’ve already looked into other payment options. Use this booklet to learn more.
5. Ask the IRS to Temporarily Delay Collection
If you’re worried that the IRS is already getting ready to send you to collections, you can request that they delay this action. Here’s how the IRS explains it:
“If we determine that you cannot pay any of your tax debt, we may report your account currently not collectible and temporarily delay collection until your financial situation improves. Being currently not collectible does not mean the debt goes away, it means the IRS has determined that you cannot afford to pay the debt at this time.”
You can find out how to make this request here, but understand that it could result in the accumulation of fees and interests, as well as a lien on your assets.
Never Ignore Your Taxes
Taxes can be a time-consuming, frustrating, and sometimes even expensive endeavor. Nonetheless, ignoring them ensures that the situation will only get worse. Not paying taxes isn’t just bad for your credit, it can be harmful to your finances overall (especially if you end up owing a great deal of interest or losing one or more of your assets).
Tackle your taxes and any money you owe head on, and remember that there are many payment options. You can view payment options offered by the IRS here, and remember that personal credit products are an option as well if you need them.