tax paymentsYour credit scores are probably the last thing you’ll be thinking about when you file your taxes this season, but did you know that there are instances when your tax payments may impact your credit scores? If you owe or plan to owe the IRS money after you file your tax return this year, keep reading to learn when your tax payments can affect your credit.

The way you pay the IRS may impact your credit

Paying the IRS on time doesn’t automatically benefit your credit, unlike other types of payments to your credit card or mortgage, for example. However, if you want to turn tax season into a credit-boosting opportunity, you can consider paying your taxes with different payment methods. In addition to permitting payments from a bank account or debit card, the IRS also allows you to pay with a credit card. Although this isn’t the best payment option for everyone, there are instances when paying with a credit card actually makes sense and can help save you money, as we detailed in this blog post. By opting to pay with a credit card, you are not only freeing yourself from the IRS, but also making a decision that may help boost your credit scores, assuming you use the card responsibly.

The IRS also has several options for individuals who can’t pay with their tax bill in full. The first option is to submit a 120-day short-term agreement that requires you to pay the balance off within 120 days. Those who can’t pay their full tax bill within 120 days have the option to set up a longer installment agreement — the best option for most is an online payment agreement. It’s important to note that if you’re an individual who owes the IRS more than $50,000 or a business that owes more than $25,000 in payroll taxes, you don’t qualify for an online payment agreement, but you can still set up a payment plan, as noted on the IRS’ website. In addition to these two options, some individuals may also be eligible for an Offer in Compromise, which allows them to negotiate a lower payment amount or receive deferment on the amount they owe. Although the IRS’ payment options are convenient for taxpayers, they will not impact a taxpayer’s credit reports unless they fail to repay, which we describe next.

Other situations when your tax payments impact your credit

Late payments won’t hurt your credit — but they can raise your tax bill up to 25% — until the IRS issues you a notice of a Federal Tax Lien, which alerts creditors that the government has a legal right to your property or financial assets. If you fail to pay the IRS (or fail to set up a payment agreement), the lien gives the IRS the right to levy (or take) whatever asset the lien is applied to in order to sell the asset and apply the proceeds toward your tax bill. While the IRS doesn’t contact creditors directly, since liens are a matter of public record, they do appear on your credit reports. The statute of limitations for tax debt is 10 years, which means the IRS will attempt to collect during that time. If you have a tax lien on your credit reports, the IRS notes that the best way to rid yourself of it is to pay your tax debt in full or set up a payment plan. Bankruptcy may also be an option if you can’t afford to pay your taxes, but know that it will have its own credit repercussions.

What are the best options for dealing with late payments?

If you set up a payment plan with the IRS and find yourself unable to make on-time payments, you should contact the IRS directly to see if an agent can offer advice specific to your situation or work out another payment plan with you. The most important thing you can do to avoid receiving a credit penalty (a lien or levy) from the IRS is to respond promptly to its correspondence — even if you can’t pay immediately, speaking to the IRS about your situation and working out a plan is better than doing nothing.

It’s important to note that starting this spring, the IRS will solicit private debt collectors to aid in dealing with the collection of back-owed taxes. As such, it’s important to become familiar with some of your rights when it comes to dealing with debt collectors, as well as the techniques of scammers who might imitate these collectors. Going forward, knowledge of both of these things might be useful when dealing with tax collectors or someone claiming to represent the IRS.

For more information about filing your taxes, tax scams and everything else you need to know this tax season, follow our tax preparation blog.