Why Would the IRS Look at My Credit?

The IRS (Internal Revenue Service) is the U.S. government agency responsible for tax collection and tax law enforcement. Most people understand that the IRS handles all things related to taxes – collecting tax payments processing tax returns conducting audits, and enforcing tax laws. However, you may be surprised to learn that the IRS can also access your credit report and credit score information under certain circumstances.

When and Why the IRS May Access Your Credit Report

The IRS does not routinely look at individual credit reports. and they cannot share your credit report data with other government agencies or private companies. However, here are some of the main reasons why the IRS may request to view your credit report

• Identity verification – The IRS may ask you to verify your identity online when accessing your tax information on IRSgov. Some of their identity verification tools work by comparing the personal information you submit to your credit report data This allows them to confirm your identity.

• Contact information lookup – If you owe back taxes, the IRS may pull your credit report just to obtain your current address, phone number, employer, etc. This helps them contact you about repayment.

• Asset identification: If you owe a lot of money in taxes, the IRS can look at your credit report to see what assets, like property, cars, or bank accounts, they could seize to pay off your debt.

• Pre-employment screening – People applying for jobs with the IRS may have their credit report checked as part of the background check and screening process. This applies to potential IRS employees as well as contractors.

How IRS Credit Checks Impact Your Credit Score

The good news is that the IRS only does a “soft inquiry” when they look at your credit report. Soft inquiries do not negatively impact your credit score.

That’s because soft inquiries are only visible to you, unlike “hard inquiries” that lenders perform when you apply for credit, which can slightly ding your credit score. IRS soft inquiries also fall off your credit report after two years.

So you don’t have to worry about the IRS harming your credit score or credit history by checking your credit report. They use this information for legitimate verification purposes only.

When Tax Issues Can Hurt Your Credit

While routine IRS access of your credit report is harmless, having major outstanding tax debts can potentially harm your credit in other ways, such as:

• Tax liens – If you fail to pay your taxes, the IRS can place a tax lien on your assets. This gives them claim over your property as collateral until the tax debt is satisfied. Tax liens used to show up on credit reports, but no longer do. However, they can still cause issues if you try to sell an asset or get a loan with that asset as collateral.

• Levies: The IRS can take money from your bank accounts or wages to pay off your tax debt if you don’t pay after multiple notices. This loss of money could make it harder for you to pay your other debts and loans, which could hurt your credit.

• Asset seizure – As a last resort, the IRS can seize and sell assets like your home, car, or other valuable property to pay your tax debt. This loss of major assets could also hurt your credit scores and history.

• Collection accounts – If you fail to pay taxes owed, the IRS can assign collection of your debt to a private collection agency. If the collector is unsuccessful, it may then report the unpaid debt to the credit bureaus as a negative item.

How to Handle IRS Credit Report Inquiries

Don’t freak out if you see an IRS soft inquiry on your credit report. Here are some tips for handling it:

• Verify that it is just a soft inquiry. These have no credit score impact. Hard inquiries from the IRS are extremely rare.

• Check whether you have any outstanding debts or issues with the IRS that prompted them to access your report. If so, address these promptly.

• If the inquiry seems suspicious, contact the IRS to confirm it is legitimate. Make sure no one is fraudulently using your identity.

• Review your full credit reports annually to check for any unusual activity, errors, or signs of identity theft.

• Consider credit monitoring to alert you whenever anyone accesses your credit report, so you can stay on top of your credit status.

Options If You Owe Back Taxes

If you have outstanding tax debts, here are some options to resolve the issue before it creates credit problems:

• Payment plans – The IRS offers short-term (180 days) and long-term (monthly installments) payment plans to pay off tax debts over time without added credit impact. Interest and penalties continue to accrue until it is paid off.

• Settle for less – An Offer in Compromise allows you to settle tax debts for less than the full amount in certain hardship scenarios, if you meet eligibility requirements. This immediately resolves the tax liability.

• Loan – You may be able to take out a debt consolidation loan with favorable rates to pay off your IRS balance, then pay off the loan over time. This replaces the IRS debt with a third-party loan.

• Credit cards – Similarly, you can use a 0% balance transfer credit card, personal loan, or home equity loan to erase IRS debt and create more manageable payment terms.

• Penalty relief – You may qualify for penalty relief on late tax payments if you have a reasonable cause. You still must pay the underlying tax balance and interest.

The IRS provides resources to help taxpayers understand their options and set up the best payment solution for their financial situation. Seeking help quickly can minimize further credit damage.

The Takeaway on IRS Credit Checks

In most cases, you don’t have to be concerned about the IRS accessing your credit report. They may only do so in specific situations related to verifying identities and tax debts. The IRS performs soft credit inquiries that don’t harm your credit.

However, failing to pay your taxes can create liens, levies, asset seizure, and other issues that make life difficult and potentially hurt your credit standing in more indirect ways. Maintaining tax compliance, or promptly addressing any lapses, can help avoid these scenarios. Monitor your credit regularly for any unusual activity.