If the IRS filed a Notice of Federal Tax Lien against you in the past, the IRS debt may have appeared on your credit report. Although the three major credit bureaus took away tax liens from consumer credit reports beginning 2018, lenders may still be able to search public records for tax liens.
Why do IRS file tax liens?
For taxpayers who have an outstanding tax bill, a tax lien will be filed by the IRS. However, if you’re making payments through an installment agreement or have made other arrangements with the IRS, you are safe from the tax lien.
The IRS will have a legal claim against all your current and future property when they a file a Notice of Federal Tax Lien against you. Among these properties is your home or car. This also means the agency is able to establish the priority to claim before those of other creditors.
Is your tax debt reported to tax bureaus?
Reporting of tax debts directly to consumer credit bureaus never happens. The law protects your tax return information from disclosure by the IRS to third parties. A Notice of Federal Tax Lien filed by the IRS, however, will cause your debt to become a public record. The public nature of the lien allowed it to be reported on your credit report before policies were changed in April 2018 by the credit bureaus.
Although tax liens are no longer shown by these agencies on credit reports, the lenders, credit card companies, etc., will still be able to find out if a tax lien is filed against you. If you’re looking for a job, employers may also view the tax lien which may have its own unpleasant effects aside from making it difficult to get new credit cards or loans and others.
The tax lien will never go away until your taxes are paid off or you arranged payments to pay it off, reduce, or remove the debt.
How does IRS payment plans affect your credit?
As soon as you receive a tax bill, it’s best to establish a payment plan with the IRS right away to avoid a tax lien or other collection action. Credit bureaus will not receive any reports of you setting up a payment arrangement with the IRS.
As previously mentioned, the IRS is not allowed to share your personally identifiable information. Lenders may discover the Notice of Federal Tax Lien but the payment plan itself cannot. If you want to know more about the options you can take if you owe taxes and can’t pay, consult a tax professional who is experienced in these types of issues.
IRS Policy Change
The privacy policy of the IRS could be changing. A report prepared by the Government Accountability Office (GAO) to be submitted to the Congress entitled, Federal Tax Debts: Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus. The GAO suggested that the following benefits can happen if tax debts is reported to credit bureaus:
A lot of people will feel the impact if reporting policies are change base on the data that showed millions of taxpayers and businesses owing a total of about $373 billion in federal unpaid tax debts at the end of the fiscal year 2011. The $258 billion comes from individual debt and $115 billion are business debt.
The GAO insisted that prior to making changes in reporting, such issues must first be considered seriously as which debts should be reported. A perfect example is whether there should be a minimum balance due before a debt is reported. Additionally, the concern on how to make sure that the information given to credit agencies is accurate and used appropriately must be looked into closely too. Direct reporting of tax debts to credit bureaus together with lien filings could also increase the risk of reporting similar negative information on the credit report of a taxpayer.
There’s a huge cost a taxpayer has to face due to a bad information on a credit report which is why it is just fair to create a procedure for taxpayers to use in disputing with what the IRS reports to credit bureaus.
The credit reporting may also backfire and cause taxpayers to avoid filing for their taxes if they know they will owe the IRS and everything will be displayed on their credit rating.
