Tax Debt May Affect Your Credit Rating

A recent report by the GAO (Government Accountability Office) is being considered, which investigates the pros and cons of letting the IRS report tax debt to credit bureaus. At present, although the IRS can file tax liens on tax debts, which are then reported by credit bureaus, the IRS cannot directly report tax liability. This is due to privacy laws surrounding the information collected by the IRS.

The report explains that, at the end of 2011, approximately $373 billion was owed to the IRS by businesses and individuals. While this is a staggering amount, breaking the figure down tells a slightly different story. Approximately half the number of people in debt owed less than $5,000, but the aggregate debt tends to be with those owing large amounts, so this still adds up to $310 billion of the total. However, some of these debts were already in the collection process, where taxpayers were disputing the amount owed, or had already organized payment plans. Approximately one-third of the amount had already been identified by the IRS as uncollectible. Additionally, over half of the total amount was already subject to liens, so was already being indirectly reported to credit bureaus.

The thought process behind reporting debts to credit bureaus is to try to reduce the tax debt inventory – the hope being that directly reporting tax debts would encourage more businesses and individuals to be compliant with the tax obligations. Of course, on the contrary, it might instead encourage more tax payers to falsify their returns so that their real tax debt does not impact their credit rating. The resulting adverse credit ratings might also create borrowing difficulties for taxpayers that would find third party loans to clear their tax liability.

Another factor that was included within the report was the importance of ensuring data accuracy. While the IRS is continually trying to improve its systems, mistakes already happen. You only have to look at the increasing levels of successful fraudulent tax returns to see how badly some IRS processes are coping. Any errors in reporting debt to credit bureaus could create extreme hardship for innocent taxpayers, who could be denied credit, employment, or housing as a result.

While there may be some advantages to direct report of tax debt, the IRS already has an indirect process in place through the filing of liens. 20/20 Tax Resolution has noticed a significant reduction in the number of liens being filed during 2012, though this does not seem to correlate with any reduction in the number or level of tax debt. Perhaps the IRS simply needs to improve internal systems and make better use of the collection activities already available before considering new legislation.