IRS May Report Tax Debts to Credit Bureaus

The IRS may change reporting rules to allow tax debt to show up on credit reports.

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Few things in this world are as important as your credit score--especially, if you want to borrow money. Not paying off a debt you owe lowers your credit score if the creditor reports the debt to a credit bureau. Until now, the IRS has not reported tax debts to credit bureaus because long-standing federal law protects the privacy of any personally identifiable information reported to, or developed by, the IRS.

Thus, if you owe the IRS money, it generally doesn’t show up on your credit report. The exception is when the IRS files a tax lien on the debt. Such liens are public filings that credit bureaus routinely find without help from the IRS.

However, the IRS's privacy policy could be changing. The Government Accountability Office (GAO) has prepared a report for Congress entitled, Federal Tax Debts: Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus. The GAO suggested that reporting tax debts to credit bureaus could result in the following benefits:

  • increase revenue by giving tax debtors an incentive to pay their tax debts (duh!)
  • encourage taxpayers to stay out of debt in the first place
  • give credit bureaus and their users a more complete credit history for improved lending or other business decisions, and
  • prevent loan applicants from taking on new debts when they are already unable to pay their existing debts.

At the end of fiscal year 2011, millions of individuals and businesses owed a total of about $373 billion in federal unpaid tax debts—$258 billion in individual debt and $115 billion in business debt. So many people would be affected by such a change in reporting policies.

The GAO stressed that, before any changes in reporting are made, there should be serious consideration of such issues as which debts should be reported--for example, whether there should be a minimum balance due before a debt is reported. Another concern was how to ensure that the information provided to credit agencies is accurate and not misused.Moreover, direct reporting of tax debts to credit bureaus along with lien filings could increase the risk of reporting duplicative negative information on a taxpayer's credit report.

Such bad information on a credit report could cost a taxpayer dearly. Thus, there might have to be a procedure taxpayers can use to dispute what the IRS reports to credit bureaus.

Another concern was that such credit reporting could backfire: Some taxpayers might not file their taxes at all if they know they will owe the IRS and it will show up on their credit rating.

In any event, you don't have to worry about the IRS reporting your tax debts to credit bureaus right away. The tax law would have to be changed first.

 January 2013

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