Video transcript:
Hello, I’m Scott from TurboTax, with important news about how your tax debt can affect your credit. When you still owe the IRS for past taxes, it’s likely that the agency will be more willing to work with you—such as allowing you to pay your tax in monthly installments—than your other creditors may be.
Since the IRS is an agency of the federal government, there are procedures in place that protect your credit score from being tarnished just because you owe taxes. For example, if you prepare your tax return and still owe additional taxes with it, this by itself is not going to impact your credit score. It’s only when you fail to pay what you owe in a timely manner, that your credit score can be affected.
The amount of tax you owe is a significant factor in determining whether your credit score will be affected. This is because your credit is only affected once the IRS files a Notice of Federal Tax Lien in court. But the IRS won’t do this unless the amount you owe exceeds a certain threshold. A tax lien can give the federal government a legal claim to every asset you own—including your home, your cars, or other property. And if it reduces your credit score, it can become more difficult for you to obtain credit in the future.
It’s important not to confuse a lien with a levy. A levy means that the government can seize your assets to cover your tax debt. On the other hand, a lien just gives the government a legal claim to your property. You get to keep your property, but the lien makes it incredibly difficult to sell.
You will always receive plenty of notice before your outstanding tax bill will hurt your credit score. The IRS will send notices informing you of the debt and requests for payment. When you receive a demand for payment, this may be your last opportunity to work something out with the IRS to protect your credit. In some cases, you may still be eligible to make monthly payments. But even if you are, the agency can still obtain a lien if it decides it’s necessary to insure repayment of your entire tax bill.
The IRS is usually willing to work with you—so you should take every opportunity to preserve your credit rating by addressing any tax issues head on, as early as possible.
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