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Do Unpaid Taxes Appear on Your Credit Report?

Ask Savvy: I Can't Pay the IRS in Full, What Should I Do?

Dear Savvy,

Yesterday I got a notice that I owe the IRS for a 2-year-old tax error. The amount is more than I have and I have only one option of paying it and that is to make payments. I called the IRS and they said that I could make payments for up to 60 months at 6 percent interest and there is a $105 dollar fee. The other option I have is to send them the entire amount owed with a check I received from a credit card I have. The fee for that is $75 and 5.9 percent interest. Just looking at the numbers it makes the most sense to put it on the credit card, however I am trying to get my credit score up. My question is: Does owing the IRS make your credit score decrease? If it does, then I might as well pay them with the credit card check since it would save me a few bucks. However, if the IRS doesn't make the FICO score decrease, I will just pay them and not use the credit line at all on the credit card.

To see my answer with information about convenience checks and unpaid income taxes just

A: First thing's first: I don't recommend using the convenience check that your credit card company gave to you. You start paying interest on convenience checks as soon as you use the check, and there's usually a fee that's a percentage of the check amount on top of the interest charged for using the checks. A 5.9 percent interest rate for a convenience check sounds quite low —be sure to read all the fine print and confirm your understanding of the rates with customer service.

While I'm not an expert on the inter-workings of the IRS and you may want to double check with a tax professional, my research tells me that an installment plan will appear in your credit history including the amount owed and the size of your monthly payments. The debt will be considered as part of your overall debt and would affect your FICO score. If you don't work out a payment plan or pay in full with your credit card, nonpayment may cause the IRS to file a Notice of Federal Tax Lien, which will stay on your credit report for at least seven years and therefore affect your credit score.

It's important to note that your work-in-progress taxes will affect your credit report using either option you mentioned. Charging your tax payment to your credit card will affect your score in the same way as paying via installment plan — your debt-to-credit ratio will increase and your credit score will be affected. You'll also be charged a convenience fee for paying your taxes with a credit card, and your credit card has control over the interest rates you're charged. At least the installment plan would give you a fixed rate with no surprises.

Whichever option you feel more comfortable with and end up choosing make sure you always pay on time to avoid any penalties or late fees. Try and pay the total amount off as quickly as possible so that your interest payments are limited.


ferny0127 ferny0127 9 years
probably the best thing to do is to use your credit card b/c the IRS charge you a higher interest per MONTH, and it goes up if you fail to send them a payment!!!!!!!!!
amber_castaldo amber_castaldo 9 years
This was great information.
gooniette gooniette 9 years
I'd go with what TidalWave did or oweing the IRS. An installment loan is better because there is an end in sight. If you put it on a credit card, it could take a lot longer to pay it off because everything else that pops up in the meantime will seem more important than paying off that card. If it's a set amount every month, you are more inclined to pay it and stick with it until it's gone.
TidalWave TidalWave 9 years
When I owed the IRS, I was able to take out a loan from HSBC that gave me 6 months free interest. Which means that IRS was paid off and I just owed HSBC money. But since I paid off the loan within those six months, I didn't have to pay any interest at all. I wouldn't put it on my credit card though.
cvandoorn cvandoorn 9 years
I wouldn't use the credit card, because your debt to credit ratio will be very high, which lowers your score. When I look at my credit report, I see that the remaining balance on my car payments does not get factored in on my debt to credit ratio, but all the balances on my credit cards do. But yeah, check with a tax professional how the IRS debt will affect your credit if you pay in installments. As for the emergency fund...yes its ideal that we all have one, but (especially with the current economy) it is hard to set aside enough money to cover you for big expenses like owing the IRS money.
linb linb 9 years
This is why it is important to have an emergency fund. If you are not saving money every month, you need to start.
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