Let’s say you’ve filed your taxes but realize that you owe a lot more than you’re able to pay off right now. What are your options? How can paying taxes late affect your credit and future?
Work out a payment plan.
Way before your tax debt goes on your credit report, the IRS will mail you several notices to warn you of the impending tax lien and to request that you work out a payment plan with them before the lien goes into effect. There are two different types of payment plans with the IRS:
- Installment: Usually for people with a tax debt of less than $50,000, this involves making monthly payments on your debt up to 72 months. So, essentially, it’s taking out a loan from the IRS. This type of payment plan comes with fees and interest on your payments, like any other loan. But you may find receiving a loan from another source is cheaper.
- 120 Days: If you can pay off your debts within 120 days, you’ll get to avoid the fees that come with the installment plans, and will typically end up paying less in interest and penalty charges. You’ll have to fill out an Online Payment Agreement Application. This is a great option if you need a little more time to gather the funds to pay off your tax debt. Read more here.
Stuck between a rock and a hard place? Prove your hardship.
You have more options if you can’t commit to a steady payment plan or a short extension. For instance, if you recently lost your job and paying your taxes would cause financial hardship, it might be difficult to know how much you can pay back month-to-month. If this is the case, you can request that the IRS extend the due date of filing your return by six months. However, interest can still accrue on any unpaid tax due at the April 15th deadline.
There’s yet another option, if your debt is more than you can handle and all other payment options have been exhausted. It’s called an Offer in Compromise, and it means that you and the IRS could agree upon a repayment that may even be less than your actual owed debt. This is discretionary on the part of the IRS, which only accepts about 25% of the submitted applications.
Understand the effects of tax debt on your credit.
Your credit score won’t immediately be affected by your tax debt, even if you’ve entered into a payment plan or worked out an Offer in Compromise with the IRS.
However, if you don’t work out a solution and your debt remains unpaid, the IRS can choose to file a federal tax lien in court to try to ensure repayment. In order for this to happen, your debt generally has to exceed a certain threshold—right now that’s $10,000.
Once a tax lien hits your credit report, it can ding your credit score by 100 points or more. That big of an impact will undoubtedly move you into a different credit score range, making it difficult for you to get approved for new credit. If you’re hit with a tax lien, know that you’re not alone. There are lots of people talking about tax liens and how they affect your credit in Credit Karma’s Credit Advice section.
Additionally, a tax lien will stay on your credit until it’s paid in full. The IRS will usually be willing to work out a payment plan at this point, but the lien will remain on your credit until it’s paid off, and it generally can’t be discharged in bankruptcy.
If you receive a notice from the IRS about your overdue taxes, respond immediately. If you do owe additional the taxes, try to pay the taxes as quickly as possible through traditional sources of financing to avoid IRS interest and penalties. If none of those options are available to you, try to work out one of the payment plans mentioned above before the IRS issues a tax lien that severely damages your credit. If you’re dealing with a tax lien on your credit report, contact the IRS to work out a payment plan as soon as possible. You can read more about your right regarding tax liens at the IRS’ website.
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