How to Protect Your Credit Score While Owing Taxes

Blog Post03/03/2016
Credit Advice

The information contained in this blog is for informational purposes only and should not be interpreted as legal, accounting or tax advice.  You should consult with your own legal, accounting and tax experts for advice.  TransUnion LLC and its affiliates do not provide legal, accounting or tax advice

The faster you handle your IRS expenses, the less likely they will have any effect on your credit scores or influence your ability to get a new credit card.

What Happens When You Owe the IRS

Paying your tax bill immediately is obviously the best solution. If you can’t do that, you can contact the IRS to request an extension or to work out a payment schedule.

The good news is that owing the IRS money at this stage shouldn’t affect your credit score. The IRS doesn’t automatically report taxes owed or payment plans to the credit reporting agencies5. However, if you fail to work out a payment plan with the IRS, they can issue a tax lien, which is bad news for your credit rating.

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How Liens Affect Your Credit Score

When the IRS is preparing to impose a tax lien, they first send a written notice. A Notice of Federal Tax Lien tells creditors that you have failed to pay your taxes and the IRS is now taking you to court to get their money. The IRS can send this information to the credit reporting agencies, and it might seriously affect your credit score. After you have paid your debt, the tax lien can stay on your credit report for seven years, but you may ask the IRS to release it

Paying Taxes with a Credit Card

The IRS does offer you an option to pay your taxes owed with your credit card. This has its pros and cons. The interest your credit card charges may be less than the combined interest and fees that the IRS would charge you for an extended tax debt. However, the increased balance now showing on your credit card will increase your credit utilization ratio, a significant part of your credit score.

How to Protect Yourself

Maintaining your credit scores while paying your taxes can be difficult. Here are three tax tips to make the situation a little less painful.

1. If you find it difficult to pay taxes due to a job loss or other unforeseen circumstances, contact the IRS. They can often offer tax relief, like an extension on your return due date.

2. Get your free annual credit report and review it for past tax problems. If you see a Notice of Federal Lien on your report that you have already resolved, contact the IRS and ask them to release the lien.

3. Consider applying for a personal loan to pay unpaid taxes rather than putting it on your credit card. This won’t decrease your credit utilization, but it may reduce the amount of interest you have to pay.

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