Back Taxes and Your Credit Score
A back tax is a tax on one’s earned income that has not been paid in the year in which it was due. Back taxes tend to accumulate interest and penalties the longer they aren’t paid. Taxpayers can have back tax at the federal, state and/or local levels.
Unpaid back taxes can be a serious issue for many taxpayers who don’t have the means to pay them. Depending upon the circumstances, the government may take one of many strategies to deal with back taxes, such as pressing charges, demanding that that the taxpayer pay immediately, or sometimes offering a voluntary disclosure program which helps avoid criminal charges and allows a variety of payment options. Failure to pay taxes can also involve imprisonment.
In the United States, your credit score is everything. It is something that you should take care of. If you don’t, getting a phone, cable or gas line hooked up in your home can be difficult to do. Your credit score is also analyzed by creditors, such as banks and credit card companies. Just try to imagine that you need to get a loan to start your own business, with a low or bad credit score, you have a lesser chance of getting that loan approved or you may get it approved but with high interest rates.
Will a tax debt show up on my credit report?
Well, it could. The IRS will not automatically run off to the land of credit agencies and warn them about you if you have built up some tax debt over the years. However, if you owe over $10,000 in taxes and continue to do nothing about it, then a Notice of Federal Tax Lien is automatically filed against you. This lien has the potential to be pretty damaging to your credit score – it will show up as a ‘seriously negative’ item on your credit report. If this has happened to you, don’t panic and keep reading. We’ll let you know how to remove this from your record and prevent this from happening to you in the future.
Can I remove a tax lien from my credit report?
You have a tax lien. This is a stressful situation, but you can only panic so much. Now you need to take baby steps toward fixing it. To do this, you’ll need to initiate repayment of your debt. First, you need to figure out how you can get IRS transcripts. Since this can stay put on your credit report up to seven years after the bill is paid, it is important to take action sooner rather than later.
The absolute most effective way to remove a tax lien from your credit report is to pay it off in full. In a perfect world, that would be stellar. However, if you are like the majority of the population, then you probably don’t have thousands set aside to hand over to the IRS.
Do the IRS offer payment plans that will not affect my credit score?
It is a common misconception that the IRS doubles as the Wicked Witch of the West. Let’s take off the ruby reds and come to terms with the fact that they are not out to make your financial life miserable. In fact, they will work with you and negotiate a payment plan to help you out. How?
You’ll need to take the initiative on this one. You can apply right from the IRS website, or check out our Tax Resolution service. With this service, Prior Tax will serve as the middleman between you and the IRS so that you don’t have to. Besides, we already know the language that the IRS will throw at you and can negotiate the best option available for your situation.
How can I ultimately stop tax liens from affecting my credit score?
Your credit score is important. It determines your loan eligibility and how much interest you will pay on those loans. Once your credit is hit negatively, it is difficult to fix but not impossible. There are always ways to hinder ill fate. To prevent a bad grade, you study for your exam. To avoid gaining weight, you eat a balanced diet and exercise.
Here are some steps to take to prevent your taxes and credit from colliding in a negative way.
- Pay off your tax debt in full. From year to year, tax debt can accumulate. If you can pay all or most of it at once, this will benefit you the most financially.
- Apply for a payment plan. Once you have an installment agreement set up with the IRS, it just becomes another monthly bill and you won’t need to worry about it.
- Update your W-4. Taxpayers tend to fill out a W-4 once with their employer and then forget about it. It is important to know that if you claim too many allowances, then too little of your income will be withheld from your paychecks to cover taxes owed. This may seem like a great idea when you see that your paychecks are bigger. However, you won’t be as happy when you receive a hefty tax bill after filing for the year.
- File your tax return on time. Even if you’ve taken all necessary precautions, filing your tax return late can tack on additional penalty and interest fees to your existing tax bill. These accumulate with each month you are late and are completely preventable.
If you need help handling your back taxes, it is time to contact Tax Crisis Institute today! Our team of professionals can help you figure out the best course of action for handling your back taxes with the least amount of damage to your credit score. Do not delay — contact Tax Crisis Institute now!