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How does tax debt affect your credit score?

If you are like most Americans, you depend on your credit score. Your credit score controls your ability to borrow money, finance a house, rent an apartment, or purchase a car. If you have tax debt and cannot pay it off in one installment, you may have fears about the future of your credit.

Everyone has to pay taxes, but it does not have to harm your credit.

Reporting your IRS debt

In the past, the IRS could report the debt to credit bureaus. The amount you owed, the amount you paid and whether you defaulted on your payments could impact your score. However, the rules changed after 2018 and now you do not have to worry about the IRS reporting your tax debt. If you owe taxes or currently have an agreement to pay monthly installments on your tax bill, it does not appear on your credit report.

Paying your IRS debt

There are ways that your IRS debt can affect your credit score. Different financial institutions offer loans and credit cards to payers specifically for tax debt. Sometimes these loan options might have a better interest rate and fewer penalties than accepting a payment plan from the IRS. However, unlike if you accept a payment plan from the IRS, the financial institution will report it to credit bureaus if you make late payments or default on the loan. Borrowing money is the only way your IRS debt will impact your score.

Before you choose an option to pay your taxes, determine the long-term impact. Remember that what works for you now may not work for you later.