IRS May Report Tax Debts to Credit Bureaus

The US Congress is currently considering a proposal that will allow the Internal Revenue Service to report taxpayers’ tax debts to consumer credit bureaus.  Millions of individual and business taxpayers owe billions of dollars in unpaid federal tax debts ($258 billion in individual debt and $115 billion in business debt was reported at the end of fiscal year 2011).  It is believed that reporting tax debt information to credit bureaus could possibly increase revenue by encouraging tax debtors to pay their debts, though issues surrounding data accuracy, alternatives, and expected benefits are all factors Congress may wish to consider in regards to this and any future proposals to report tax debts to credit bureaus.

Most debts owed are less than $5,000 per taxpayer.  However, debts over $25,000 total $310 billion.  Some debts are covered by installment agreements while others are in the collection process.  But, approximately $110 billion of the total debt has been classified as uncollectable by the IRS.

Long-standing federal laws protect the privacy of personal information by forbidding the IRS from reporting tax debts to credit bureaus that collect and sell information about the credit history of individuals and businesses.  The IRS is, however, allowed to file tax liens on some tax debts and since tax liens become part of public record, credit bureaus can access such information when compiling credit history reports.

Since a negative listing on a credit report can lead to a bad credit rating and, in turn, effect things such as loan interest rates, taxpayers will want to avoid tax debts, which is exactly what this proposal is expected to encourage.  However, the National Taxpayer Advocate cautions that reporting tax debts to credit bureaus could cause some taxpayers to choose not to file or to file erroneously if they know they will owe money to the IRS.