If you have tax debt that you’re unable to pay, there are simple steps you can take to avoid further tax consequences. It’s important to understand the IRS can take several actions to collect if you don’t pay your taxes or make arrangements to pay them, such as charging interest and penalties, filing a tax lien against property or seizing assets.
If a lien is placed they can also send a public notice to creditors, which can impact credit scores and disrupt the process for anyone trying to buy a home. A borrower with a lower credit score must usually pay higher interest rates. Borrowers with tax liens may also be rejected by lenders. A lien can also stay on your credit report for seven years after it’s been paid and 10 years if your tax debt has not been paid. But you can avoid this!
The IRS offers a number of options to people who can’t pay their taxes in full right away. Once you have filed your current taxes, you can go online and request an installment agreement if your tax liability is under $50,000. If it is over $50,000, you can still request an installment agreement by calling the IRS or mailing in an Installment Agreement Request Form 9465. You will have to pay interest and penalties on the unpaid balance, but at least you can pay your tax debt over time (over six years, if needed) and avoid a lien on your credit. The IRS will also notify you by mail of payment options once you have filed your taxes if you can’t pay.
Another option is to apply for an offer in compromise (OIC). This allows you to pay less than the full amount you owe. Anyone who applies needs to file all required tax returns. You can also ask the IRS to delay collection in the event that you can’t pay any of your tax debt due to hardship. If the IRS agrees to delay collection, keep in mind that it can still charge penalties and interest and can file a Notice of Federal Tax Lien. The IRS will lift a federal tax lien after a taxpayer fully repays their debt, or meets the terms of an offer in compromise.
Outside of that, you can apply for a “discharge” of the lien from a property. One reason the IRS might accept this is if you’re selling the property and the proceeds will pay off your tax debt. If you can’t pay your tax debt it doesn’t mean the IRS will automatically file a tax lien so you won’t be able to purchase a home. You can avoid tax liens by communicating with the IRS and paying your taxes through an installment agreement or one of the other methods mentioned.
You may not be anxious to file your taxes, but there are plenty of free and paid tools to help you easily and accurately file your taxes and figure out your tax liability. It might seem like a pain, but not dealing with your taxes could hamper your financial goals, including owning a home.