As if having to pay taxes wasn’t stressful enough, not paying your taxes can and will affect every aspect of your financial life – and yes, we mean beyond being yet another bill to pay. How do unpaid taxes plague your finances exactly? Those three little numbers: your credit score. Since you know how important your credit score is, let us walk you through how your unpaid taxes make it to your credit report, and importantly, how to prevent that from happening.
When you’re hit with a tax bill, the IRS is fairly flexible as long as you communicate. You can set up an installment plan, negotiate the amount, and come to other agreements before your tax burden turns into lasting damage. However, if you reach this point, where your tax bill remains unpaid and an agreement is not reached, a tax lien will result. This often takes some time, except in the instance of owing $10,000 or more; in this case, the IRS will automatically file a Notice of Federal Tax Lien. A federal tax lien on your credit report isn’t a small hit; it’s in the same category as a repossession and other high impact court judgements.
Note that you can receive a tax lien from federal, state, or local unpaid taxes.
Once a lien is on your credit report, your score can drop significantly. What’s worse, the lien can remain for up to 10 years, meaning your score will remain lowered. After it’s paid, it will remain for 7 years. Think of all of the financial decisions that can occur across this span of time – car loans, mortgages, credit cards, and more.
One solution might be to file bankruptcy; however, this often does not erase tax debts, although it is possible in some cases.
The best, and perhaps most obvious solution is to pay your debt in full. After payment is received, the lien will be removed within 30 days, and you can start rebuilding your credit. Often, this isn’t feasible for the person indebted.
The next best solution is to opt into a Direct Debit Installment Agreement. After you do this (or pay your debt in full) and fill out Form 12277, the IRS will be prompted to withdraw the lien.
Always pay as much of your tax bill as financially possible, and if you cannot, communicate with the IRS to come to agreeable terms. The worst thing you can do is ignore your debt with the IRS; as stated above, lasting damage will result, and your financial standing will suffer more than the debt itself.
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