It’s tax season, and we all know what that means. The time has once again come to figure out what you owe the IRS, and to cross your fingers that you get back something back if you’ve overpaid. While the process is often fairly straightforward, sometimes our tax debts are much higher than expected and we find ourselves falling behind on payments. When this occurs, the taxes that we owe are called back taxes.
Back taxes refer to taxes that were not paid when due. You can owe back taxes at the federal, state, or local levels. When you fail to pay your taxes, the debt accrues interest and penalties, and it will only continue to build until they are paid off. Failing to pay them can also negatively impact your credit, which is just another reason to make sure your tax payments and debts are taken care of. So, how can your credit score be impacted? Let’s discuss.
- The amount you owe
One of the main factors in determining whether (and how much) your credit score will be impacted due to back taxes is the amount of debt that you actually owe. It follows that if you owe a very high amount, your credit score is more likely to be impacted than if you owe a small amount. However, it’s important to note that failing to pay your taxes will not automatically impact your credit. In order for this to occur, the IRS would have to file a “tax lien.”
- Tax Liens
The only way that owing back taxes will directly impact your credit score is if the IRS files a Notice of a Federal Tax Lien. A tax lien gives the government the right to seize your property, including your home. But, the government will only take this step after repeated failures on the debtor’s part to even attempt to pay their tax debts and after several rounds of written notice. Tax liens are reported on your credit score, and can remain there for up to ten years. Having a tax lien on your credit can cause your score to drop significantly and will continue to hurt it for as long as it remains on your report.
- Using a credit card to pay your back taxes
An alternative way that owing back taxes can impact your credit score is if you use a credit card to pay off a sizeable debt. Anytime you use up a majority of your available credit, your score can drop. This is just another reason why it’s always a good idea to try to work with the IRS first if you ever find yourself owing a significant amount in back taxes.
Speak with an experienced tax professional.
Although it’s possible that owing back taxes will hurt your credit score, it’s important to remember that the IRS is more than willing to work with you in order to get your debts straightened out. There are several repayment options and plans available to those in debt, and you will receive plenty of notice from the IRS in advance of them doing anything that would hurt your credit score or property. Also, once you have paid the amount owed down to $25,000 or less, and have a payment plan to pay the rest, you may be able to have the lien removed from your credit report by asking the IRS to withdraw its Notice of Federal Tax Lien. It is for these reasons that it’s essential you speak with an experienced tax professional right away so that you can avoid any long-lasting damage.
At Boeshaar Law, we regularly help our clients with all sorts of complex state and federal tax issues. If you have received notice from the IRS for outstanding debts and need help to determine your next steps, please don’t wait to contact us today!
- The IRS Makes Mistakes Too - September 1, 2023
- Should You Be Withholding More From Your Paycheck? - August 1, 2023
- Don’t Get Tripped Up By Forms 433-A and 433-B - July 10, 2023
