by Beth Kotz @ credit.com
Times are tight, and paying taxes in full can sometimes be a tall order. But keep in mind that falling behind on what you owe to the IRS can make you the subject of a tax lien, which will appear on your credit report as an outstanding debt with potentially serious consequences.
Your credit score is based on a number of factors, including negative marks – such as failure to pay your taxes. This score then directly impacts your ability to find financing for a number of everyday necessities, including auto loans, mortgages, and credit cards. The higher your credit score, the more likely you are to be approved for financing and receive the best rates and terms. The lower your credit score, the more likely you are to be rejected for financing or be offered higher interest rates. There are several instances in which a failure to pay your taxes can hurt your credit. First, a failure-to-file, which begins at 5 percent of your tax bill and can go up to 25 percent. Even if you filed an extension, you’ll still be penalized with a .05 percent late filing fee – as well as a 3% daily compounding interest. After 60 days, you will be charged $135 or 100% of the taxes owed, whichever dollar amount adds up to less.
Unfortunately, if you continue to ignore the issue, the problem will only get worse. The Internal Revenue Service has the right to file a federal tax lien motion in court, and unpaid tax liens will stay on your credit report for up to 10 years from the date filed. This, as we mentioned, will make it difficult to obtain the credit and financing everyone needs in addition to causing undue hassles with the Internal Revenue Service.
If you have failed to pay your taxes in the past, it is vital that you check your credit report so that you will know where you stand. You might not even be aware that the IRS has filed a tax lien and reported your failure to pay your taxes to the credit reporting bureaus. Be aware that you are entitled to receive one free credit report each year from the three major credit reporting bureaus. If you are not sure whether the IRS has already filed a tax lien against you, it’s wise to take advantage of the opportunity to check credit report scores. Any liens filed against you will be noted in your credit report. In most cases, the IRS does not issue liens unless you owe more than $10,000. Even so, it’s definitely worth it to check your credit report to be sure!
Once you have paid down the amount of taxes you owe below $10,000, you may be able to ask to have the lien removed. The lien may still remain on your credit report unless you file what is known as an Application for Withdrawal. If your request to have the lien removed from your credit report is successful, the lien will be removed from your credit report as though it had never been filed. If you have recently found yourself in a situation in which you are not able to pay your taxes in full, it is best to try to work with the tax authorities and consider other payment options. Such options include paying with an installment agreement. By demonstrating to the Internal Revenue Service that you are making a good faith effort to pay the taxes as agreed, you may be able to avoid a tax lien and prevent the loss of your property and hard-earned wages.
As the wise man Ben Franklin once said, “In this world nothing can be said to be certain, except death and taxes.” From time to time everyone experiences difficult financial circumstances, but neglecting your tax responsibilities is a serious matter and can have far-reaching consequences on all aspects of your life. Act in your own self-interest and check your credit so you know where you stand and if any tax liens appear on your record. This knowledge is power – once you have a full picture of your financial circumstances you can take steps to make certain that unpaid taxes do not haunt you for many years to come.
Beth Kotz is a contributing writer to Credit.com. She specializes in covering financial advice for female entrepreneurs, college students and recent graduates. She earned a BA in Communications and Media from DePaul University in Chicago, Illinois, where she continues to live and work.