As individuals, we all face times when we need to make payments on a large expense but don`t have the means to pay it off all at once. When it comes to tax debt, the IRS offers taxpayers the option of setting up an installment agreement to pay off their debt over time. However, many taxpayers are hesitant to do so because they are unsure of how an installment agreement will affect their credit.
So, does an installment agreement affect credit? The answer is both yes and no.
First, let`s discuss how an installment agreement can affect credit. When taxpayers set up an installment agreement with the IRS, it shows up on their credit report as a “tax lien release.” This means that the IRS has removed the lien on the taxpayer`s property, and the taxpayer is now responsible for paying off their tax debt through the installment agreement.
While the installment agreement itself doesn`t directly impact credit, there are potential negative consequences that can arise from having a tax lien release on your credit report. For example, having a tax lien release on your credit report could make it more difficult to obtain credit in the future, as it indicates to lenders that you have had trouble paying off debts in the past.
Additionally, having a tax lien release on your credit report could cause your credit score to drop. This is because the release of the lien could be seen as a negative event by credit reporting agencies. However, the impact on your credit score will depend on a variety of factors, such as the size of your debt and your overall credit history.
Now, let`s discuss how an installment agreement can actually benefit credit. While having a tax lien release on your credit report may seem like a negative, it`s important to remember that the alternative – unpaid tax debt – is much worse. Unpaid tax debt can lead to wage garnishment, bank levies, and other collection actions that can severely damage your credit score.
By setting up an installment agreement and making payments on time, you are showing lenders that you are taking responsibility for your debt and working to pay it off. This can actually improve your credit score over time, as it demonstrates that you are a responsible borrower.
In conclusion, while setting up an installment agreement with the IRS can have negative consequences on your credit report in the short term, it`s important to remember that the alternative – unpaid tax debt – is much worse. By making payments on time and working to pay off your debt, you can actually improve your credit score in the long term. So, if you`re struggling with tax debt, don`t be afraid to explore the option of setting up an installment agreement with the IRS.