Nobody likes tax season, well maybe accountants do. For financial professionals, it represents their busiest and therefore most profitable time of year. For the rest of us, it can be a difficult and potentially stressful time when you have to collect all your financial documents for the year, ensure you have all your receipts and proof of your deductions and assemble it all in your yearly tax return. It can be a paperwork headache, and if you already have the sneaky suspicion that you may have underpaid during the year, it can be quite a scary prospect to fill out the official forms that will likely result in a hefty tax bill.
Everyone has to file their taxes each year. It saps your time and is a laborious task, but it is required. So after you compile all your paperwork, run the numbers and file your return it can feel unfair to receive notice that you are being audited. You may even feel anxious about this scrutiny surrounding your finances, and you may start to worry about whether you got your calculations right. The penalties for misfiling your taxes can be steep and affect your bottom line for years to come, so it’s natural to be concerned if you find out you are the subject of an audit.
Tax audits have become the thing of nightmares in pop culture with movies and TV shows depicting tax collectors in a negative light and showing an audit as a stressful and fraught time.
However, it doesn't have to be that bad. If you are being audited, and you're wondering does the IRS affect a credit score in the long term, don't worry, arm yourself with the facts, organize your paperwork and remember you'll get through this.
What Is an Audit?
Receiving an audit notice can send people into a spiral of panic, but it doesn't necessarily suggest there is a problem with your taxes. The Internal Revenue Service conducts audits when they need more information to confirm whether an individual has reported the correct amount of earnings and calculated the correct amount of taxes owed. As the IRS's website explains, audits are not always a cause for concern. Random or computer-generated selection sends some notices for audits. You may also be selected for an audit if you have business dealings with an individual or business who is also being audited or who is under investigation by the IRS. Being audited for this reason can seem unfair if you feel you haven't done anything wrong, but it's a routine part of an investigation and is undertaken to ensure the process is fair for everyone.
It's another layer of protection that the IRS has put in place to limit the number of fraudulent returns that are filed and to hold taxpayers accountable.
However, audits are also conducted when your filing doesn't add up with other information the IRS has or when they may suspect improper tax filings. That's why it is so important to promptly reply with all the information requested. If the documents you return suggest that you underpaid your taxes, you may be kept up at night worrying and wondering if owing money to the IRS affects your credit score. Ignoring the IRS can also make you incur additional costs such as interest and fines as well as making you look guilty for more serious crimes such as tax evasion or fraud.
Although your tax professional can give you lots of advice at this time, it's important to remember that your return and any associated debt you incur is your responsibility. If you ignore communications from the IRS, they may be forced to use their information or calculations to work out your outstanding bill which could be more than you actually owe.
What Do I Need to Do?
The IRS will alert you to the audit in writing. Don't fall for any scams where callers demand money to avoid audits because the IRS will never initiate an audit over the telephone. If you are ever asked for personal information related to your taxes over the telephone, ask the caller to contact you in writing and hang up.
If you are under audit, you'll receive full instructions by mail detailing everything you need to supply. You will also be informed whether you need to attend an in-person interview with an IRS representative or if you can return the documents and forms by mail. If it is determined that you have a balance to pay and you can pay it in full, do it as soon as possible.
Does the IRS Affect a Credit Score?
Being audited can be stressful, especially if you think you may have made a mistake with your tax return or perhaps misreported income or deductions. If you had a professional tax accountant prepare your return, then contact them and seek out their advice on the audit and have them help you compile all your required documents. They may have invaluable advice and experience in this area to answer all your questions about the process and set your mind at ease.
You may also be concerned with the future, and if an audit can have lasting issues such as does the IRS affect a credit score.
Being audited will not necessarily negatively affect your credit score. However, the outcome of the audit can affect your credit score. If it's determined that you underpaid your taxes and you have an outstanding balance, your ability to repay this debt could affect your credit score. If you can pay the debt immediately the case will likely be closed, and it should not affect your credit rating. However, if the difference is large and you are unable to pay it back immediately, then you could run into problems, especially if it takes you a long time to repay the outstanding balance.
People usually run into problems when they refuse to discuss the matter with representatives from the IRS or try to dodge calls from the IRS. Taxes cannot be ignored – they will not go away if you pretend they are not there – and they will likely grow into a much bigger problem.
According to Business Insider, your credit rating could be affected if you end up owing money to the government and you don't pay it back promptly. If you owe a lot of money, avoid repayments or take too long to pay back your debt then the IRS can then choose to file a tax lien against you and as a public record, this would show as a debt on your official credit record.
How Does Debt Impact Your Credit Score?
Experian, one of the large credit monitoring bureaus explains that a credit score is a number that credit lenders use to determine if you are a suitable candidate for a loan. Your score is usually between 300-to-850 and is assigned to you after gathering information from your credit report to assess your ability to repay debt.
Your credit score can be increased by taking on debt that you can pay off, sometimes called 'good credit' and by having credit available to you that you have not used. Missing payments on debt repayment or exceeding your credit limit on credit cards, for example, can lower your credit score.
If left unpaid, tax liens will stay on your credit record forever. If they are paid off, they will still stay on your credit record for seven years, impacting your credit score and your ability to make all sorts of everyday purchases. Without a credit card, it can be challenging to travel and book hotels, rent a car or build up your credit rating for more important transactions like buying a new home or renting a new apartment.
Low scores signal that you likely already have an appropriate amount of debt, or too much debt and are not a good candidate for further loans. Whereas a high score shows, you can handle additional debt responsibly.
Owing money to the IRS can affect your credit score, especially if you take a long time to repay the money or if you miss payments. The IRS will usually not issue a lien against you unless you owe an amount higher than their threshold of $10,000 and not if you are attempting to make payments or if you have set up regular repayments.
It is essential to communicate with the IRS over an amount owing and explain your circumstances. Even modest repayments will help your case so long as they are prearranged with the IRS and are consistent and regular.
However, if you fail to pay up once a lien is issued things can start to get serious. The IRS can garnish your wages, and even repossess your belongings and property if you fail to repay your debt. Once a lien is issued, the credit bureaus will be notified, and your credit rating will be negatively affected. Once on your credit report, it can be difficult to have the tax lien removed from your record even after you have repaid your outstanding tax debt. A tax lien can affect your ability to buy a house, a car or even get a job if a good credit record is part of the recruitment process.
What to Do if You Owe the IRS Money
Like any debt, money owed to the IRS can ruin your life if it is not addressed and repaid quickly. Owing money to the IRS affects your credit score and can contribute to a low IRS credit score so do your research and find out what you should be doing if you receive notice of an audit.
Get a Fresh Start After a Tax Lien
The IRS is not a heartless government department, and they do want to help people get back on their feet after paying off their debts. Which is why they offer the Fresh Start program to help taxpayers recover after a tax lien has been issued. The program can help you pay back your debts in manageable installments, lower your penalty fines and payments and help you have the lien removed from your credit record more quickly.
When faced with a large unpaid tax bill one of the scariest parts can be that the bill continues to grow with penalties, fines and interest as long as you resist arranging a payment plan. This soaring debt can make people feel out of control and lead them to panic. The Fresh Start initiative gives eligible people six months of extra time to organize repayments before stacking on fines, penalties and interest.
The worst thing you can do if you are audited and found to be owing more taxes is to bury your head in the sand and pretend it's not happening. You should never ignore official tax requests and letters from the IRS. Contact the IRS immediately if you cannot afford to pay your taxes and set up a plan to repay your outstanding debt without adversely affecting your credit score.
Fiona Tapp is a freelance writer and educator. Her work has been featured on The Washington Post, HuffPost, The Toronto Star, Brit+Co, and others. She writes about a variety of topics including Homes, Parenting, Education, and Travel. Fiona is a former teacher and masters degree holder.