Will paying taxes late hurt your credit?

Paying back taxes with an installment plan set up by the IRS can actually spare your credit from suffering some serious damage down the road.

Jeanine Skowronski
by Jeanine Skowronski, MainStreet contributor

 

Q. Will arranging a payment plan with the Internal Revenue Service to pay my back taxes on time hurt my credit score?

A. No. According to a spokesperson for the IRS, federal law prohibits agents from sharing taxpayers’ information with a third party, so the fact that a consumer has agreed to pay back their taxes using an installment plan would not be reported to the three major credit bureaus: Equifax, Experian and TransUnion.

Your credit score would be affected, however, if you incurred a tax lien issued by the IRS after failing to pay your taxes. Such liens grant the government a legal claim to a taxpayer’s property that is equal to the amount of unpaid taxes.

READ: Will owing taxes affect your credit score? | Video

With liens, technically it’s not the IRS that is telling on you to the credit bureaus, but the public court record that is generated when the lien is filed. Credit bureaus can see these and the records are notoriously hard to remove from your credit history file.

As we have previously reported, liens can lower a person’s credit score up to 100 points or more, depending on the score they had prior to receiving the lien (the higher the score, the lower it tends to fall).

The IRS made adjustments to its lien program not long ago, raising the threshold at which liens can be instituted from $5,000 to $10,000 in back taxes.