Does Owing The IRS Affect Your Credit Score?

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irs affects your credit score

When you owe the IRS for past taxes, in most cases the agency may be willing to work out a payment plan for you to satisfy your debt. Know that your debt with the IRS might not affect your credit score immediately. If you file your taxes on or before April 15 and you realize that you owe money that in itself does not have a negative effect on your credit score. It’s when you fail to pay in a timely manner that may ultimately affect the score.

Whether or not your credit score is affected is linked to the amount of tax you owe. If that amount is over a certain limit established by the IRS ($10,000 as of late), a tax lien may be filed against you. A tax lien gives the IRS a legal right to your property and all other assets you posses but does not mean it can seize them to satisfy your debt. In any case, if this is the way the IRS decides to go, you will receive plenty of notice and you should not ignore it.

Once the lien has been issued it will remain on your record until you pay your debt and can’t even be discharged in bankruptcy court. Know that you still have a chance to set up some type of debt payment method regardless of the lien.

By how much can your credit score be affected?

Once a tax lien is issued that’s when your credit score gets affected. Tax liens appear on credit history and have an immediate negative impact on your score. It can affect your score by 100 points, which may have significant long-term consequences on your finances. For once, regardless of the score you may be disqualified all together from receiving a loan for a mere fact of having a lien against you. Even if you are able to qualify for future loans you should certainly expect higher interest rates making the loans much more expensive.

How to pay your debt to the IRS?

There are some options when it comes to paying off your debt to the IRS. The first step is not to ignore the IRS communication and contact the agency to work out some type of plan. Many taxpayers often set up an installment payment plan and if certain conditions are met, your debt may be forgiven.

The installment plan still has fees and penalties factored in but in a way it is a loan you obtain form the IRS. If you have access to other sources of financing you may compare the fees between them and select the best option.

Here is a link to a previous article on how to pay off your balance to the IRS.

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