Credit reports and tax debt: 3 things to know

If you are struggling to pay the IRS, chances are you are also struggling to pay other creditors.

You may or may not have considered bankruptcy, as part of a plan to resolve your issues with debt and move forward.

Regardless of whether you have filed bankruptcy, however, how will your tax issues affect your credit score? Here are three things to know.

Paying your taxes with a credit card can be a genuine option.

Financial self-help gurus such as Dave Ramsey constantly preach against credit card use. Their argument is that using credit cards only gets you into deeper financial trouble, and that the goal should be cut them up on the way to financial independence.

There is, however, an alternative view. For one thing, paying your taxes with a credit card can in some cases actually improve your credit score.

Failure to pay your taxes or set up a payment plan can lead to a federal tax lien, which goes on your credit report.

A federal tax lien is a big negative hit on your credit score. By the time you get a notice of federal tax lien, this damage is already done.

That’s one reason why it makes sense to try to resolve your tax debt to avoid a lien.

Bankruptcy can be used to resolve tax debt in some cases.

As we noted a post last year, in certain circumstances bankruptcy can be used to address tax debt.

To be sure, bankruptcy hurts your credit score. But if you can’t pay your bills anyway, your score may already be pretty low. If that is the case, bankruptcy can be a step along the way in rebuilding your credit.