Back Tax Balance Negatively Affects Credit Score – Back tax balances have a number of consequences, one of which is a negative impact on the delinquent taxpayer’s credit score. A back tax balance has the potential of reducing a person’s credit score by over 100 points, depending on the specific circumstances. If a taxpayer negotiates an Offer in Compromise or other tax settlement agreement that resolves a tax debt for less than the full amount owed, their credit score will be negatively affected for seven years from the date the partial payment settlement agreement is finalized. If, on the other hand, the back tax balance is not resolved and the IRS attempts to collect the tax debt by placing a tax lien on the taxpayer’s personal property, the lien will remain on the taxpayer’s credit report indefinitely, until the back tax balance is paid in full.
In addition to lowering a person’s credit score, owing back taxes has a number of other negative consequences. Because the IRS treats an outstanding tax liability like a loan from the government, they charge interest on any tax amount due. In addition, they assess a failure-to-pay penalty for each month there is a back tax balance up to a maximum of 25% of the initial tax amount owed. These two amounts are compounded over time and can potentially amount to as much as 50% of the original tax liability. Beyond charging interest and assessing penalties, the IRS will actively attempt to collect back taxes if the balance remains unpaid for any length of time. They will begin by issuing an IRS Letter or an IRS Notice and will follow that with more aggressive collection techniques such as a tax lien, a tax levy or a wage garnishment.
The negative effect on the credit score, the compounding financial assessments and the threat of enforced collection activities are all good reasons why back tax balances should be avoided if at all possible. If an outstanding tax liability does occur, the best course of action is to either promptly pay the back tax balance in full or request a short term tax extension. Although interest will continue to accrue during the period of an extension, the IRS will not initiate any further collection activities during the 120 day time period. If neither of these payment methods is an option, a taxpayer can pursue one of the numerous tax settlement options offered by the IRS. These tax settlement options include the Installment Agreement where the full balance of a tax debt is paid over time as well as the Partial Payment Installment Agreement and the Offer in Compromise where the IRS agrees to settle a tax debt for less that the full amount owed.
If you have a back tax balance that you are unable to pay, our tax settlement professionals can help you resolve it. With over 16 years in the business of resolving tax debt, we have a thorough understanding of tax law together with the experience to know which tax settlement option will be the best fit for your specific set of circumstances. For more information about our services, visit us today at professionaltaxresolution.com. Contact us by phone at (877)-889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.
