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Does Paying Your Taxes Late Affect Your Credit Score?

  • By Credit Diva of Dallas
  • 29 Apr, 2021
  • 0 Comments

It is always a best practice to be timely with your finances. When you get a bill in the mail, and that bill carries a due date, you want to make your payment by that date each time. It is critical to get into these good habits at a young age and then carry them forward in life. This is how you can build up a high credit score over time. This also means learning how different financial moves and obligations will impact your credit score.

One question many taxpayers have is whether or not their taxes have an impact on their credit score.

How do your taxes link up with your credit score? Does paying your taxes late affect your credit score? Keep reading to find out.

Accountant working at the officeAny Benefits to Paying Taxes Timely?

When you are filing your taxes, the goal should always be to get them on file with the Internal Revenue Service before or on tax filing day, which for most years is April 15th. When you file your taxes timely, that also means you will be paying your tax bill on time as well. 

When you do this, though, there is no direct benefit to your credit score. The fact that you did a filing of your taxes to the IRS has no positive impact on your credit score you will notice on your credit report. But this doesn't mean that you shouldn't pay on time. Whether you're worried about your score or not, paying taxes late or skipping payments altogether carries other financial and legal implications.

Impact of Paying Taxes Late

There could potentially be an impact on your credit score in the event you do not pay your taxes on time. When you fail to pay your taxes, the Internal Revenue Service may place on your credit score what is a federal tax lien. This essentially is a direct filing with the credit bureaus on your credit report that you owe money to the Internal Revenue Service.

When you do not pay your taxes immediately, there will not be a direct impact on your credit score like you would get if you missed a credit card or loan payment. Instead, it is not until the lien is in effect and in place that you will see the notice and the impact on your credit score. 

Understanding a Tax Lien

So what exactly is a tax lien and why are they critical things to hone in on as a taxpayer? A federal tax lien is something that the Internal Revenue Service will use when you do not pay your taxes. The filing then happens with the credit bureaus and, once this is complete and hits your credit report, the results will be ugly. 

The threshold for the Internal Revenue Service to file a federal tax lien is $10,000. In the event you owe more than that amount to the Internal Revenue Service, they will automatically put the lien on your credit report if the taxes are unpaid for a period greater than 30 days. 

Computational stripes of a calculatorHow to Get Rid of the Lien

There are ways that you can get rid of the tax lien on your credit report. You can work with the Internal Revenue Service to get the taxes you owe on an installment plan. It could be that they can automatically deduct payments from your bank account periodically until the full bill is repaid. If you have this arrangement set up, you may file to have the lien withdrawn. When this happens, the full lien disappears as the payments back to the Internal Revenue Service do not appear separately on your credit report.

There is always a lot to consider when it comes to taxes. You want to be sure you are filing them on time and when you do, you are paying your tax bill. If you are unable to pay the taxes that you owe, you should work with the Internal Revenue Service. Taking out credit cards or a personal loan to pay taxes can also inadvertently cause negative impacts on your credit score. Be on time, pay in full, and avoid harm to your credit with good practices in working within the IRS deadline and expectations. 

Whether you've experienced a lean on your credit as a result of late tax payments or not, we can help you get back on the right path towards a better credit score and more financial success. Contact us today to learn more!

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