How Do Tax Relief Services Affect Your Credit Rating?

Tax relief services might save you thousands of dollars when you have to appear before the Internal Revenue Service to negotiate a tax debt. Not only does this save money, it could help your credit score, because the IRS will probably file a tax lien once it has to start collection procedures. Going to a tax relief service, however, is a risky move because it could just cost a lot of money for no benefit.

Identification

When you owe the IRS money, you have the option of hiring a third party to represent you in tax disputes. Tax services claim they can bargain down bills or find extra deductions in your return. These services do not directly impact your credit score. Instead, the tax relief service might negotiate a removal of a tax lien or settle the debt so the IRS can declare the lien paid. Tax liens are awful for credit scores, because it is an unpaid debt, so it can lower a score by 100 or more points.

Considerations

Few tax relief services guarantee results. You could end up paying hundreds or thousands of dollars in fees to the company and end up with the same tax bill but further in debt. This money could have gone to pay off your tax debt or other debts on your credit report. The faster you eliminate debt or pay off a tax lien, the sooner your credit score improves.

Tip

Shop around for the price and services of several tax relief services before choosing one. Some of the most highly respected tax relief companies guarantee that they will at least save you the fees you pay and possibly more on your tax bill. The IRS rarely accepts an Offer in Compromise -- only about 15 percent of OIC receive consideration -- so it may pay to have a professional look at whether this is even an option in your case. The IRS rarely accepts anything less than full payment if the taxpayer has any earning potential or assets.

Alternative

If you just need extra time to pay your tax bill, you can probably forgo a tax relief specialist. The IRS offers guaranteed payment plans to some taxpayers. Those who owe less than $25,000 in taxes, for example, automatically qualify for a 120-day extension on their tax bill. Once you pay a tax debt, the IRS erases a tax lien on your credit report almost instantly because of changes in IRS regulation. Before 2011, paid liens stayed on reports for seven years.