Changes in life circumstances can often affect your tax bill in unanticipated ways. Maybe you made the transition from employee to self-employed this year. Suddenly, your company isn’t withholding your Medicare and social security taxes for you – leaving you to with more to pay come tax season.
If you’re facing an unexpectedly high tax bill this year – and you don’t have the money available to pay it off – you may be worried about what this means for your financial outlook. Can one simple oversight impact your credit score – and your financial future?
The answer depends on how you respond to the situation:
Doing nothing
Like any type of debt, ignoring it will not make it go away. If you ignore your tax delinquency, the IRS is likely to take strong action against you. They can file a tax levy or lien against your home, car or other property. This is a claim on – or seizure of – your property for failure to pay.
Anytime you have a tax levy or lien on your record, it will hurt your credit score, making the consequences of this debt long term.
Owning up to it
Fortunately, there is another option. The IRS understands that not everyone has thousands of dollars on hand for a rainy day. If you’re unable to pay your taxes, you can set up a long-term repayment plan with the IRS – known as an installment agreement. This allows you to pay off your debt in small, monthly installments, usually over a period of three to six years, depending on how much you owe.
Setting up an installment agreement demonstrates a good-faith effort on your part to remedy the situation, so the IRS is unlikely to report your outstanding debt to the credit bureau.
A tax attorney can help you negotiate with the IRS in setting up such an agreement. They can also work to understand your situation and provide other solutions for resolving tax delinquencies.