Back taxes are taxes that an individual or business owes to the government for previous years. These can be federal or state taxes that were not paid on time, underpaid, or not paid at all. Owing back taxes can lead to a range of consequences, including wage garnishment, asset seizure, and legal action.
One question that often arises is whether owing back taxes affects your credit score. In this blog post, we will explore this topic in detail to provide you with a better understanding of how tax debt impacts your credit score and financial stability.
How Do Credit Scores Work?
Credit scores are numerical values that reflect an individual’s creditworthiness. They are used by lenders, landlords, and other financial institutions to assess the risk of lending money or extending credit to an applicant. Credit scores range from 300 to 850, with higher scores indicating a better credit history.
The importance of having a good credit score cannot be overstated. A good credit score can help you secure loans at favorable interest rates, obtain rental housing, and even land a job in some cases. On the other hand, a low credit score can make it difficult to get approved for loans or lines of credit and result in higher interest rates.
Your credit score is determined by a range of points such as payment records, debts due, length of your credit history, types of accounts held, and new requests for lines of credit. Payment history is one of the most critical factors as it reflects whether you have paid your bills on time. Amounts owed also play a significant role as they indicate how much debt you owe in relation to your available credit. Length of credit history refers to how long you have had open accounts and how frequently you use them.
How Tax Debt Affects Your Credit Score?
Owing back taxes can have a significant impact on your credit score. The Internal Revenue Service (IRS) and state tax agencies report unpaid tax debts to credit bureaus, and these debts are treated like any other delinquent account.
One of the most immediate impacts that back taxes can have on your credit score is through payment history. Late payments or missed payments will lower your credit score, making it harder to obtain loans or lines of credit in the future. In addition, if you owe a significant amount of money in back taxes, this can increase your amounts owed, which accounts for 30% of your overall credit score.
Another way that owing back taxes can affect your credit score is through tax liens. A federal tax lien is a legal claim against all of your property, including real estate, personal property, and financial assets. State tax liens work similarly but only apply to assets within the state. These liens remain on your credit report for up to seven years from the date they are paid off or released.
Having a tax lien on your credit report can make it challenging to obtain new lines of credit or loans as lenders see this as a sign of financial instability. It’s essential to payoff any back taxes as soon as possible to avoid further damage to your credit score and financial well-being.
Other Consequences Of Owing Back Taxes:
Not only can owing back taxes take a toll on your credit score, but it also has the potential to cause an array of other serious consequences as well. Without further ado, the most common are as follows:
1. Wage Garnishment:
If you owe back taxes and do not make arrangements to pay them, the IRS or state tax agency may seek a wage garnishment order. This means that a portion of your paycheck will be withheld each pay period to satisfy the debt.
2. Seizure Of Assets:
The IRS or state tax agency may also seize assets such as bank accounts, real estate, vehicles, and personal property to satisfy the debt owed.
3. Legal Action:
If you continue to ignore your tax debt, the IRS or state tax agency may take legal action against you. This can include filing a lawsuit in court or seeking criminal charges for tax evasion.
4. Interest And Penalties:
Owing back taxes can also result in additional interest and penalties being added to your debt over time, making it even harder to payoff.
It’s important to address any back taxes as soon as possible to avoid these severe consequences. If you’re unable to pay the entire amount owed, then you may have the option of establishing a payment plan with either your state or federal tax agency. Moreover, an offer in compromise could be negotiated too if appropriate.
What To Do If You Owe Back Taxes?
If you owe back taxes, there are several options available to help resolve the debt. Here are some of the most common:
1. Installment Agreements:
You may be able to set up a payment plan with the IRS or state tax agency to pay off your debt over time. This can make it more manageable to payoff your debt without facing wage garnishment or asset seizure.
2. Offers In Compromise:
If you’re unable to payoff your full tax debt, an offer in compromise could be the ideal option for you. It’s a contract between yourself and the Internal Revenue Service or state tax agency that allows you to settle your taxes for less than what is owed. This solution can help bring light back into any dark financial situation!
3. Currently Not Collectible Status:
If you are experiencing financial hardship and cannot afford to payoff your tax debt, you may be able to qualify for currently not collectible status. This means that collection efforts will be suspended until your financial situation improves.
No matter which option you choose, it’s essential to communicate with the IRS or state tax agency promptly. Ignoring your tax debt will only lead to additional penalties and interest, making it more challenging to resolve the issue over time.
When communicating with the IRS or state tax agency, be sure to always provide accurate information about your financial situation and any assets or income sources that could help satisfy your debt.
Owing back taxes can affect your credit score if an IRS lien is placed on your account. Although paying back taxes does not necessarily raise your score, it does stop it from going down. If you are struggling to payoff a large debt owed to the IRS, seeking assistance from professionals in the tax field is a beneficial step.
At Ideal Tax, they have staff certified in CRA and IRS collections processes who can ensure you remain informed of all options available to help balance the debt through payment plans or even by forgiveness. Let their experts guide you through this difficult process – contact Ideal Tax today.