When you owe the IRS money, setting up a payment plan is one way to take control of your debt and avoid more aggressive collection actions. But this choice often leads to one question from our clients: “Will an IRS payment plan hurt my credit score?” The good news is that an IRS payment plan will not directly affect your credit score.

However, there are ways that your tax debt can indirectly impact your credit. Therefore, it helps to consult with a tax professional from Seattle Legal Services when resolving unpaid taxes. Get started by contacting us online or calling 425-428-5262.

Key Takeaways

  • IRS payment plans don’t show up on credit reports and don’t affect your credit score.
  • Tax debts can still indirectly affect your credit in several ways, such as if you were to miss a payment or a lender discovers your tax lien from the public record.
  • Working with a tax professional allows you to approach tax debt in a way that protects your financial well-being and credit.

Will an IRS Payment Plan Show Up on a Credit Report?

No, an IRS payment plan won’t show up on a credit report and won’t affect your credit score. The IRS works in an entirely separate system from the credit reporting bureaus like Experian, Equifax, and TransUnion. So when the IRS decides whether to offer a payment plan, they don’t pull your credit. And when creditors decide whether to approve a credit line, they don’t look at your tax history.

Your installment plan is not reported to any credit bureaus, and both your balance owed and payment history remain between you and the IRS. This is good news for taxpayers who want to stay in good standing with lenders and avoid the credit hit that often comes with opening a new account.

However, there are circumstances in which your tax debt may indirectly affect your credit. Understanding these circumstances can help you avoid surprises as you get your finances in order.

When Tax Debt Can Affect Your Credit

If payment plans aren’t reported to the credit bureaus, how can tax debt affect your credit? We’ll explore a few different avenues.

Past vs. Present Rules on Tax Liens

Prior to 2018, federal tax liens showed up on credit reports. That meant that not only would you not have full access to your assets, but your lien could also negatively affect your credit. That changed in 2017 when the three credit bureaus decided to stop reporting civil judgments and liens. By April 2018, tax liens no longer appeared on credit reports.

While a tax lien may not show up on your credit report, it can still keep you from getting credit. Liens are still public record, and if a potential lender looks into those public records, they’ll see that you have a federal tax lien on your assets. This may call your credit trustworthiness into question and lead lenders to stay cautious. This is especially a risk if you want to use your assets as collateral or if you’re applying for a mortgage, where underwriters look for every potential red flag before approving a loan.

General Financial Trouble

Tax debt rarely occurs in a vacuum. When someone is behind on their taxes, they often struggle with financial matters in general. General financial instability can lead to missed payments and late payments, and those do impact your credit.

Stretching Financial Limits to Pay the IRS

Tax debt can influence your credit if you have to stretch your budget to make payments on your installment agreement. For example, if you fall behind on other bills and loan payments due to your payment plan, that can lead to multiple negative credit hits. You could also see your credit suffer if you rely on credit cards and increase your balance to get by or take out personal loans to pay off your tax debt.

While these last two examples don’t directly affect your credit score, they show how tax debt can have a ripple effect on your general financial health.

Types of Payment Plans and Their Implications

There are several types of payment plans. Each one works slightly differently, but none of them are reported to credit bureaus.

Short-Term Payment Plan

This is the more informal type of payment plan offered by the IRS. If you meet the basic requirements, you simply request a short-term payment plan online, and the agency extends your due date by 180 days. As long as you can pay the tax debt off within 180 days, the IRS doesn’t pursue more aggressive collection actions.

Long-Term Installment Agreement

If you need more than 180 days to pay off your tax debt, the IRS offers a long-term installment agreement. Now sometimes referred to as a simple payment plan, this payment option stretches your debt out until the Collection Statute Expiration Date (CSED), which is typically ten years from the day the tax was assessed.

Your monthly payment is roughly your outstanding tax balance divided by the number of months left until the CSED. The actual payment will be slightly higher to account for interest and penalties. To stay compliant with your payment plan, you also need to file and pay all taxes on time for the life of your payment plan.

Partial Payment Installment Agreement

This is a need-based type of aid that is suitable for those who can make monthly payments but can’t afford the minimum payment required for a simple payment plan. With a Partial Payment Installment Agreement, you make monthly payments until the CSED, at which point the rest of the debt is forgiven. There’s more scrutiny with this type of payment plan, because the IRS reserves the right to resume collection efforts if your financial circumstances change.

Protecting Your Credit While on a Payment Plan

There are several things you can do to protect your credit while tackling tax debt.

  • Stay current with other debt: Don’t let your mortgage, car loans, or credit cards fall behind because of your tax debt. Even one late payment can cause your credit score to drop, limiting your ability to use credit in the future.
  • Automate payments: Automating payments can save you money on fees and prevent potential default. Additionally, it can help you avoid a lien that may show up when creditors look into your background.
  • Watch your credit report: While tax liens aren’t reported on your credit report, it’s always smart to keep an eye on your credit report for erroneous entries. You can pull your credit report for free from each bureau once per year.
  • Avoid high-interest loans: Loans may offer temporary relief from tax debt, but the interest on payments can be financially crushing. If you have a line of credit that’s lower than the IRS’s interest rate, this may be worth using—but avoid high-interest credit cards and payday loans.

When It’s Time To Talk to a Tax Attorney

Dealing with the IRS alone can be intimidating, particularly if you want to protect your credit and overall financial stability while taking care of your taxes. Working with a tax professional can help you secure a plan that fits your financial needs and gets you caught up with the IRS.

Your tax professional can review your financial situation, find the right payment solution for you, negotiate payment terms on your behalf, and help prevent more aggressive collection actions. If it turns out a payment plan won’t work, they can help you consider other tax resolution avenues, such as an offer in compromise or Currently Not Collectible status.

At Seattle Legal Services, we’re committed to helping clients find tax relief solutions that set them up for success. Let’s talk about your options now. Call us at 425-428-5262 or contact us online now.

Frequently Asked Questions

Does an IRS payment plan affect my credit?

No. IRS payment plans aren’t reported to any credit bureaus and won’t show up on your credit report. They don’t affect your credit score, but can impact your ability to borrow money.

What happens if I miss a payment with my IRS payment plan?

If you miss a payment, you’ll have a short grace period to get caught up. If you fail to do that, you could default on the plan, and the IRS may send you a CP523 Notice. This indicates the IRS’s intention to terminate the payment plan and levy your assets if you don’t take immediate action.

Will a federal tax lien show up on my credit report?

As of 2018, federal tax liens are no longer included on credit reports. However, lenders and underwriters can still see federal tax liens, as they’re part of the public record. As a result, a lien may still affect your overall ability to borrow money.

Do tax levies affect your credit?

Tax levies don’t directly affect your credit. However, if the IRS seizes your bank account or garnishes your wages, your ability to pay your bills may be affected—and that may lead to a lower credit score.

 

Sources:

https://www.irs.gov/payments/payment-plans-installment-agreements

https://www.irs.gov/payments/online-payment-agreement-application

https://www.irs.gov/individuals/understanding-your-cp523-notice