Receiving notice of an audit pending against your income tax return does not automatically affect your credit. However, your credit standing may be at risk depending on the result of the audit and how you choose to handle the outcome. Not all Internal Revenue Service audits result in bad news, but if your result is not favorable, your attention to the matter does impact your creditworthiness and ability to obtain new credit or loans.
Examination of Return
An examination, or audit, of a return you filed is simply a review of items you claimed on your return. The IRS uses several methods to select returns for audit, including a random selection process. During the exam, you must provide proof of all income and deductions or expenses you reported. If you prove all the items, your exam likely will result in no change to the items you originally claimed. If you can’t prove all the items, the IRS examiner may disallow some of your entries. This can result in a loss of certain deductions or credits, and often creates a tax balance due at the end of the exam.
Full Payment of Balance Due
If you owe additional tax at the end of your exam, you have the option of paying the balance in full. This is the easiest way to resolve the issue without any additional financial repercussions. If you have the means to pay the full balance, the matter is closed and the IRS makes no entries concerning the amount owed to your credit report.
If the audit results in additional tax and you can’t pay the balance in full, the IRS does provide additional options for you to pay the amount owed. However, depending on the size of your balance and type of repayment option you choose, the IRS may be required to file a federal tax lien against your property to protect its interest in your debt. Tax liens affect your credit and remain on your report until the balance is paid in full, or until the debt is legally resolved through settlement or statute expiration.
No Balance Due and Refunds
Audits that result in no changes to your return, changes with no balance due, or changes with a refund due to you will not affect your credit. These results indicate that you don’t owe the IRS any additional taxes. If you don’t owe any money, the IRS has nothing to report to the credit bureaus regarding your return.
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