Report Advice

Why Is There an Inquiry From the IRS on My Credit Report?

Through April 20, 2022, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

Any notice that comes from the IRS may seem ominous—but the tax agency doesn't only send bad news. When the IRS does a credit inquiry on you, it's not a sure sign they're poking into your finances or a sign of trouble. Rather, the agency may simply be trying to verify your identity to avoid fraud or so they don't send your private tax details to someone other than you.

What Does It Mean if I See an Inquiry From the IRS on My Credit Report?

An inquiry from the IRS shouldn't necessarily be a cause for concern.

While the IRS has the legal authority to access your credit file for reasons related to collections investigations, it's common for the agency to request help from a credit bureau simply to verify a person's identity. If an IRS inquiry on your credit report concerns you, it's best to consult a tax professional.

If the IRS uses credit report information to verify your identity, it will cause a soft inquiry to appear on your credit report. Soft inquiries will be removed from your report after about two years and will not affect your credit score. The inquiry will only appear on the file maintained by whichever credit bureau responded to the IRS request. So if the IRS requested the inquiry through Experian, for instance, that activity will not show up on your TransUnion or Equifax credit reports.

The IRS works with a credit bureau to verify your identity by asking the bureau to generate security questions based on the information in your credit report. For example, you might be asked about previous addresses, when you opened certain accounts and which lenders you've borrowed from in the past. When this is done, the IRS won't see your credit report, and the credit bureau won't see your tax information.

The questions you'll be asked are multiple choice, so if they're referencing an account you opened a while ago, the different options might jog your memory. If you don't know the answers to some of the questions, that could be an indicator of fraudulent activity on accounts under your name.

But there are several reasons the information in these questions might be unfamiliar. For instance, you may have applied for credit with one lender not realizing that it was owned by another company, and the parent company may be the one listed on your report. If you're an authorized user on someone else's account, the details might not be familiar to you either.

If you are concerned about identity theft, you can reduce the risk of fraud on your tax or credit accounts by regularly checking your transaction records and requesting your free credit report each year to look for any unfamiliar account activity. Additionally, you may want to enroll in Experian IdentityWorks℠, which includes identity theft and dark web monitoring, along with alerts about any suspicious activity linked to your credit report.

Can Owing the IRS Hurt Your Credit?

Outstanding taxes do not appear on your credit report, so if you owe the IRS, you can breathe easy as far as your credit is concerned. But while your overdue taxes won't hurt your credit score, the IRS charges interest and penalties on back taxes, and these costs can snowball quickly.

Tax liens are not included on credit reports, either. In 2017, Experian, TransUnion and Equifax decided to eliminate them from consumer files. As of April 2018, tax liens no longer showed up on any reports and the policy remains in place today.

However, a tax lien can still negatively impact your borrowing opportunities. If a lender searches public records as part of their loan application process, they may find out that you have a tax lien and deny your application because of it.

If you're behind on your taxes, you can set up an installment agreement with the IRS to bring your account current. The payments you make under that agreement will not be reported to the credit bureaus, but they will help you clear your debt over time. These installment plans do, however, accrue interest and fees, and you'll have to pay a setup fee to establish the plan.

You can also pay tax bills using a credit card or personal loan. If you make your monthly payments on those accounts on time, your payment history can boost your score. Keep in mind, though, that your credit utilization also affects your score, so charging a large tax debt to a credit card or taking out a substantial loan may pull that number down. You may also end up paying much more in interest, especially if you put the bill on a credit card.

Does Tax Information Show Up on Credit Reports?

Tax information—including on-time payments and back taxes—will not show up on your credit report. But ignoring a tax debt or pushing it down the road can hurt your finances.

If a lender finds out you have a tax lien against your property, they may not feel confident working with you. Furthermore, when you apply for a mortgage, you'll need to disclose all your debt payments, even if they don't appear on your credit report. A substantial IRS bill or big monthly payment affects your debt-to-income ratio, which plays a substantial role in lending decisions.

The best way to handle your taxes is head-on. Even if you can't pay your bill in full, making as large a payment as you can and setting up a payment plan for the rest will help you close out the debt with a clear timeline. On the other hand, you may choose to take out a loan to pay off the IRS so your credit score can benefit from your on-time payments.

However you choose to handle it, you want to be proactive rather than letting your tax bill pile up. As you manage your bills, it's important to monitor your credit closely and address any late payments or potential fraud as quickly as possible. A great credit score can help you stay prepared for any tax-related expenses in the future.