A question I’m asked quite frequently is whether an IRS audit could potentially affect your credit score in California. The short answer is that an IRS audit itself will not affect your credit score. However, the consequences of an audit could indirectly impact your credit score, particularly if it leads to unpaid tax liabilities. Let’s look at some common situations in which your unpaid tax debt may affect your other finances and, as such, your credit score.
First and foremost, going through an IRS audit will not affect your credit score, even if the result of the audit is that you owe the federal government back tax payments. Credit bureaus like Experian, Equifax and TransUnion focus on your borrowing and repayment history — credit cards, loans, bankruptcies, collections — not your tax filings.
Where the audit result may have an effect is if you fail to pay those back taxes or if those payments affect your budget and you start missing payments on other debt. Additionally, if you use credit cards to pay your tax bills, it could impact your credit as well. This can happen in a few ways.
First, if an IRS audit finds that you owe additional taxes and you fail to pay them, the IRS may file a Notice of Federal Tax Lien. Although tax liens are not reported to credit bureaus, they are still considered a public record, which means lenders can discover that information through public records searches and may view them negatively when evaluating your creditworthiness for loans or credit applications.
Second, if you are unable to pay your tax debt and it puts a strain on your finances, you may miss payments on other credit accounts, such as your mortgage, credit card payments or auto loans. Those missed and late payments are reported to the credit bureau. Your payment history is a major factor in credit score calculations, and missed payments can significantly lower your score.
Third, if you use credit cards to pay your taxes and do not manage your balances well, it could lead to high credit utilization or take your credit card threshold close to the maximum amount of credit allowed. Those things can negatively affect your credit score.
Finally, if an audit reveals massive tax debt you cannot repay — and no other options work with respect to repayment — you may consider bankruptcy. Filing for bankruptcy does have a big negative impact on your credit score and can stay on your report for up to 10 years.
If you are going through an IRS audit, here is how you can minimize the impact of that audit on your finances.
- Respond promptly to all IRS communications and deadlines.
- Work with an experienced tax attorney or tax professional who will ensure everything is being handled properly.
- If you owe money as the result of an audit, communicate with the IRS about payment options to avoid collections.
- Do not miss payments on existing credit obligations while dealing with the audit. This may affect what type of payment plan and interest rate you are offered with the IRS.
Going through an IRS audit can be a stressful process, even if the audit is straightforward. Take solace in knowing the audit, nor its results, cannot directly harm or affect your credit score. stressful, but it doesn’t have to harm your credit — and often won’t, if managed responsibly. It’s always best to consult with an experienced San Francisco tax attorney who can make sure the audit process is handled easily and your finances are shielded from the audit and its results.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
