Currently, if you owe the IRS money, it generally doesn’t show up on your credit report. The exception is when a tax lien is filed on the debt. Since a lien is a public filing, the credit bureaus can easily find them. The IRS is not allowed to release other tax debts because of federal privacy laws. This could be changing.
The Government Accounting Office (GAO) has sent a report to Max Baucus the chair of the Senate Finance Committee and Charles Grassley a ranking member of the Senate Judiciary Committee suggesting that the law be changed to allow tax debt reporting. For 2011, individuals owed $258 billion and businesses $115 billion in tax debt. The GAO is suggesting the change to help collect the debt. The idea being a taxpayer would be more likely to pay off the debt if it will improve their credit rating and make it easier to obtain credit. It would also give potential lenders a better picture of the taxpayer’s financial situation.
There are a lot of issues to be worked out should Congress want to change the privacy law.
- Which debts and will there be a minimum balance due before it’s reported?
- How can the accuracy of the information the credit agency has be maintained?
- Will reporting debts actually increase collections?
Because of the impact a credit report can have on credit, housing and even employment, Congress needs to move carefully. The National Taxpayer Advocate’s Office has expressed concerns that it might cause taxpayers not to file if they know they will owe the IRS and it will show up on their credit rating. My concern is the accuracy of the reported tax debt. It can take the IRS a while to update their files when a taxpayer pays off a debt. Then there is time to notify the credit bureau and for them the make the internal changes. That could take some time to resolve. Time where the taxpayer will be affected by a debt long paid.
Right now, this is just a proposal but it’s something to keep an eye on in the future.