The IRS does not report tax audits to major credit bureaus, but failure to pay back taxes, penalties and fees can result in a tax lien. If a tax lien is imposed, it can have a negative impact on credit scores.
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What Happens in an IRS Audit?
An IRS tax audit typically occurs due to discrepancies on a tax return. The IRS can perform an audit to review the accuracy of a tax payer’s reported income, deductions, and other tax information on a federal tax return. A tax audit will require the taxpayer to gather documented evidence that supports the numbers reported on his/her federal return. If the audit uncovers a tax liability, the taxpayer will be required to pay the full amount of taxes, penalties and fees owed.
If the tax liability is a substantial sum, the taxpayer may work out a payment installment agreement with the IRS for the full amount. If the taxpayer can’t pay the full amount owed, an offer in compromise (OIC) may be a possibility. An OIC agreement between the IRS and a taxpayer settles tax liabilities for less than the full amount owed. However, 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 the tax audit finds that the taxpayer owes back taxes, penalties, and fees, the IRS may file a tax lien against the taxpayer if tax liabilities are not paid. Paid tax liens remain on a credit report for up to seven years, and unpaid tax liens remain for up to 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 significantly, depending on the amount of the tax liability and the taxpayer’s efforts to repay the debt. Tax liens can negatively impact getting new credit or a loan, 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 from being filed.
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