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The IRS and Your Credit Report

In response to a request from Senators Baucus, Hatch, and Grassley, the Government Accountability Office (GAO) released a report regarding factors that Congress should consider in implementing a bill that would allow the IRS to report tax debts to credit bureaus such as Equifax, Experian, and TransUnion. The September 2012 report can be found here: (www.gao.gov/assets/650/647988.pdf).

Federal law restricts the IRS from sharing any personally identifiable information that it collects or develops. As it relates to this issue, this means that the IRS is restricted from giving information to the credit bureaus regarding a taxpayer's tax liabilities. At this time, the only information regarding tax debt that makes it on to a taxpayer's credit report is whether a tax lien has been filed against them for delinquent liabilities. The IRS does not directly report this information to the credit bureaus; however, because tax liens are part of the public record once recorded, the credit bureaus are able to collect this information from county recorder's offices.

Current IRS policy dictates that, absent any special circumstances, a tax lien will be filed only when a taxpayer's liability exceeds $10,000. So, if a taxpayer's liability does not exceed $10,000 and the IRS has not filed a tax lien against them for special circumstance, then creditors have no way of knowing that the taxpayer owes money to the federal government.

The GAO report notes that the sharing of tax liability information with credit bureaus could benefit both creditors and the IRS. Creditors looking at a debtor's credit report would have a more complete picture of a debtor's financial situation and the IRS may well get paid a lot faster if a taxpayer's ability to borrow money or get competitive interest rates from creditors is affected.

The GAO report also notes that, in addition to potential privacy issues, the National Taxpayer Advocate Office expressed concern that the sharing of tax information with credit bureaus may result in some taxpayers choosing not to file or to file inaccurately in fear of the impact it will have on their credit score.

Though the report does not indicate how soon a law allowing the IRS to share information with credit bureaus may be proposed or enacted, taxpayers with delinquent tax liabilities should consider the effect such a law would have on their credit and make efforts to prevent any negative impact.

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