Paying your federal taxes when they become due isn’t always an option. When you have other debts to worry about and money is tight, you have to consider all of your options. An IRS installment agreement is a solution to this problem, but some people may be hesitant because they aren’t exactly sure how it works and how it can affect their credit score.
If you can’t pay your taxes and are considering alternatives, here’s what you need to know about IRS installment agreements and how your credit score can be affected.
What is an IRS Installment Agreement?
When the tax due date rolls around, taxpayers are expected to have already paid their taxes or to make a payment that day. It is like any other bill that you have to pay, but making one lump sum payment is not ideal for those who simply don’t have the money. Paying the total amount due may not be possible that day, and avoiding this debt is out of the question, so an installment agreement is an affordable alternative that will allow taxpayers to take care of this debt.
An installment agreement is one option for those who need a bit of time to pay their tax debt. An installment agreement is an agreement between the IRS and taxpayers. This agreement gives taxpayers the chance to take care of their tax debt over an extended period of time and ensures the IRS receives the money that is owed.
The IRS will then automatically withdraw payments on the due date every month, or you will make manual payments on or by the due date every month.
Do IRS Installment Agreements Affect Your Credit Score?
Credit scores are calculated using information about your payment history, debt, credit history length, new credit, and types of credit accounts you own. Each of these categories counts for a percentage of the credit score, and depending on a certain activity, people may see a negative or positive score change.
For example, a missed or late payment on your student loan, a new credit card account, and even a denied personal loan application can negatively affect your credit score. An on-time payment or not applying for new credit will have a positive effect on your credit score. That being the case, it is important to avoid certain activities if you don’t want to see a drop in score.
As mentioned above, your credit report will list the debts you owe; however; not all debts will be included in your report. The information listed on a person’s credit report is submitted or reported by creditors, and the IRS does not report federal tax debt to the credit bureaus. This means that an IRS installment agreement does not directly affect your credit score.
Should You Apply for an IRS Installment Agreement?
There are disadvantages to an installment agreement, but the one advantage that makes this option so appealing to taxpayers is that they can pay off their debt over time with no effect on your credit score. If you cannot pay your federal taxes by the due date, then an installment agreement may be the best option you have that will ensure you get this debt paid off and avoid further penalties.