Does Filing Taxes Late Affect Credit Score?
Filing taxes late won't directly lower your credit score, but the consequences of unpaid taxes can still affect your access to future loans.
Many people worry that filing taxes late will damage their credit score. The relationship between tax obligations and credit reporting is specific, and understanding the difference between the act of filing your taxes and the separate issue of paying your taxes is important for managing your financial health.
The Direct Relationship Between Tax Filing and Credit Scores
The act of filing a tax return does not directly influence your credit score. The Internal Revenue Service (IRS) and the three major credit bureaus—Equifax, Experian, and TransUnion—operate as separate entities. There is no system for the IRS to report your tax filing status to credit bureaus.
This means that whether you file on time or late, the act of filing is not recorded on your credit report and does not factor into your credit score. Your credit report details your history of borrowing and repaying debts, not your compliance with tax filing deadlines. The financial consequences of filing late, such as failure-to-file penalties, are managed directly between you and the IRS and do not appear as negative marks on your credit history.
How Unpaid Tax Debt Can Lead to a Federal Tax Lien
While the timing of your tax filing is not a factor for credit reports, failing to pay the taxes you owe can set in motion events with financial consequences. When tax liabilities are not paid, the IRS can file a federal tax lien, which is a legal claim against all your current and future property, including real estate and personal assets.
Before the IRS files a lien, it first assesses your liability and sends you a bill, known as a Notice and Demand for Payment, that details the amount of tax owed plus any penalties and interest. If you neglect or refuse to pay the full debt after receiving this notice, the IRS may then file a Notice of Federal Tax Lien in the public record. This action serves as a public alert to other creditors that the government has a right to your assets to secure the debt.
The Impact of a Tax Lien on Credit Reports and Lending
In 2018, all three major credit bureaus removed tax liens from consumer credit reports. As a result, a federal tax lien will no longer appear on your standard credit reports from Equifax, Experian, or TransUnion, and therefore will not directly lower your credit score.
However, this removal does not make a tax lien invisible. A Notice of Federal Tax Lien is a public record, filed with a county courthouse or a state’s secretary of state office. Lenders frequently conduct separate public record searches as part of their underwriting process, especially for a mortgage or a business loan.
When a lender discovers a tax lien, it signals a heightened level of risk, making it much more difficult to get approved for new credit. The existence of the lien indicates a substantial outstanding debt and a history of non-payment to the government. It can also complicate your ability to sell or refinance property, as the government’s claim must be settled before the transaction can be completed.
Proactive Steps to Manage Tax Debt
If you owe the IRS and cannot pay the full amount immediately, you can take proactive steps to avoid a federal tax lien. The IRS offers several programs to help taxpayers manage their debt. One of the most common solutions is an Installment Agreement, which is a structured payment plan that allows you to make monthly payments for up to 72 months.
For taxpayers who owe a combined total of under $50,000, consisting of tax, penalties, and interest, a long-term payment plan can often be set up online. Entering into such an agreement can prevent the IRS from filing a lien.
For taxpayers with more significant financial hardship, an Offer in Compromise (OIC) may be an option. An OIC allows certain taxpayers to resolve their tax liability with the IRS for a lower amount than what they originally owed. The IRS evaluates factors like your ability to pay, income, expenses, and asset equity when considering an OIC. Successfully negotiating one of these agreements can also lead to the withdrawal of a previously filed tax lien, clearing the public record.