August 8, 2022
Does owing back taxes affect my credit score?
Sometimes, a change in life circumstances can affect your tax bill more than you realize. One of the most common examples of this is making the transition from being an employee of a company to becoming a self-employed person.
Being your own boss requires you to take more responsibility over your tax situation. Your employer no longer withholds money from your wages for social security and Medicare taxes, meaning you will now owe money on these – in addition to your regular tax obligations.
Many self-employed people choose to file their taxes on a quarterly basis – in order to stay on top of their tax obligations and avoid a steep bill each April. However, if it’s your first time being self-employed, you may not have known to do that. As a result, you could be facing an unexpectedly high tax bill that you can’t afford to pay.
Can failing to pay this hurt your credit score? It depends on your response to the situation:
If you choose to do nothing regarding your outstanding debt, it won’t go away. The IRS will take action to recoup the money you owe – in the form of either a tax levy or lien. This involves making a claim on – or physically seizing – your property to pay off your debts. In addition, anytime you have a tax levy or lien issued against you, it will negatively impact your credit score.
Waiting for the IRS to come knocking is never your best option. However, there are other courses of action available to you if you are unable to pay what you owe – which can make the IRS treat you more leniently.
You can face your debt head-on by setting up an installment plan with the IRS. This is a repayment program that allows you to pay off your debt incrementally over time – usually over three to six years. If you set up an installment agreement and make regular payments, the IRS will be unlikely to report your debt to the credit bureau.
Creating an installment agreement can be a great option for serious tax delinquencies. For this and other solutions regarding outstanding tax debt, it can be worth consulting with an experienced tax attorney for guidance.