Will my unpaid taxes appear on my credit report?

Manage Your CreditWill your unpaid taxes appear on your credit report? Yes, but let's look at the big picture first.

Unpaid taxes and the tax gap

Every year approximately $385 billion dollars, or 15% of the total amount due in federal taxes, remains unpaid. Given the current economic climate, the government is making renewed efforts to close this "tax gap." With these efforts comes an increased chance that your taxes may be audited.

The majority of unpaid taxes results from underreported income. If you find yourself being audited, chances are you'll be faced with a tax bill higher than you expected.

The increased likelihood of being audited, combined with the increasing pressures on household finances is leaving many middle class Americans in a position they have never been in before - being unable to pay their taxes. Falling behind on your taxes remains a taboo subject, but it can happen for a number of reasons, including:

  • Losing your job
  • Your employer going out of business
  • Changes in family circumstances

Sticking your head in the sand may be appealing, but it is better to let the IRS know of your situation sooner rather than later. There may even be some IRS programs available to help.

Even without an audit, if you suspect your tax bill to be higher than you can afford, it is still important to file your taxes on time. Filing your taxes late can result in interest charges. Failure to pay your taxes can result in expensive penalties which could progress to tax liens for amounts that remain unpaid. Failure to file at all could be construed as tax evasion and result in a judicial sentence.

Showing unpaid taxes on your credit report

Unpaid taxes appear on your credit report in two ways:

  • As a repayment agreement with the IRS
  • As a tax lien

In the first scenario let's assume you can meet some of you tax obligation, but not all in one payment. In this situation you could enter in to a repayment agreement with the IRS. This will show on your credit report in the same way as any other loan and will include the total outstanding, the monthly repayments and the payment terms. This will change your debt-credit ratio which in turn could impact your credit score.

Your credit score affects your ability to access financing, as well as the rates at which credit is available to you. Regardless of your tax situation, it is a good idea to obtain a copy of your credit score at least once a year and check the accuracy of the data held on you.

Tax liens and your credit report

Being behind with the tax man can have serious consequences. If your taxes remain unpaid you may find yourself the subject of a tax lien - where the federal or state government asserts its right to your home or car to secure payment of the tax debt owed.

Ultimately the asset attached to the lien can be seized and, if this happens to your home, you will be left with the mortgage debt, even though you no longer own the property. A tax lien will show on your credit report for seven years, the same length of time as bankruptcy. So not only are the consequences severe, but they can be long lasting also.

On a more positive note, tax lien guidelines have recently changed. If you are able to pay off the outstanding tax debt, you can ask the IRS for a Certificate of Withdrawal. When this certificate is presented to the three credit bureaus (TransUnion, Experian and Equifax) they are legally required to remove details of the tax lien from your credit report. Checking your credit score allows you to confirm that the tax liens have indeed been removed.


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