The IRS does not report tax audits to major credit bureaus, but can it affect your credit score? Failure to pay back taxes and penalties can trigger tax liens that negatively impact credit ratings.
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What Happens in an IRS Audit?
Tax return discrepancies typically trigger audits. The IRS performs audits to review the accuracy of a taxpayers’ reported income, deductions, and other declarations.
If an audited taxpayer owes significant sums, he or she can work out an IRS payment installment agreement. If the taxpayer can’t pay the full amount, an offer in compromise (OIC), which reduces the owed amount, may be possible. Note, however, that taxpayers who can fully pay the liability through an installment agreement or other means, typically won’t qualify for an OIC.
How Does an IRS Audit Impact Credit?
The IRS does not report tax audits to credit bureaus like TransUnion, Equifax, and Experian. However, if auditors finds that taxpayers owe money, the IRS may file tax liens, which remain on credit reports for seven years. Unpaid tax liens can stick for 15 years. With back taxes of $10,000 or more, the IRS is required to file an automatic Notice of Federal Tax Lien in a taxpayer’s credit file, even if the debt is paid.
Tax liens show up as derogatory marks on credit reports. They can lower credit scores, depending on the tax liability and repayment efforts. Tax liens can negatively impact creditworthiness, increase interest rates on existing credit cards, and raise insurance premiums. Negotiating an installment agreement or an offer in compromise with the IRS can prevent tax liens.