Does Getting Audited by IRS Affect Your Credit?

A letter from the Internal Revenue Service that informs you of an upcoming audit is not something most consumers want to receive. Owing money to the IRS is never a good thing. The agency has extensive collection powers and can seize your assets without a court order. If you're facing an audit by the IRS, it's prudent to understand how such an audit could impact your credit.

Significance

Your credit score is based upon your credit report. The information in your report is reported to the bureaus by creditors. The Internal Revenue Service does not extend credit to consumers. An audit by the IRS is an assessment by the agency to ensure you've paid all of the federal taxes that you owe. The IRS auditor will look over your financial records and ask you questions based upon those records, but the IRS does not report the audit, nor information discussed during it, to credit bureaus. The results of an audit, though, could ultimately have an impact on your credit, depending on whether you have a debt to the IRS, and if so, how you handle it.

Considerations

If an IRS audit determines that you owe the federal government more money, the agency will require you to pay that amount. The IRS allows you to set up payment arrangements for past-due tax obligations. The agency also accepts what is known as an Offer in Compromise, which allows you to pay less than the total amount of your tax bill if you meet certain conditions, such as experiencing a financial hardship. Approval for an OIC isn't automatic. You will have to apply to the IRS and find out if the offer is accepted.

Consequences

Although the IRS does not extend credit to consumers, if you fail to pay a tax obligation, or to make arrangements with the IRS for payment of the debt, the agency can place a federal tax lien against you. A tax lien will appear on your credit report as a public record. Public records are derogatory items to have on a credit report and will lower your FICO credit score. How much it lowers the score depends upon the other items in the credit report.

Prevention/Solution

If you have an outstanding tax bill, or if you're facing an audit by the IRS, the agency has a division that may be able to offer you assistance. The Taxpayer Advocate Service is an independent organization within the IRS that assists consumers with tax problems. Their services are free and they have various offices set up around the country. The organization assists both consumers and businesses in handling their IRS tax problems, and may have information on tax solutions that you didn't know were available to you.