Tax Audits and Your Credit Rating

The IRS does not require a credit report for a tax audit.

Even though the Internal Revenue Service generally does not request to see a taxpayer’s credit report when conducting an audit, the government agency has the right to report uncollected taxes to the credit bureaus. Tax debt you owe to the IRS is reported to the credit reporting agencies only if a federal tax lien is filed against you, according to JK Harris, the nation’s largest tax resolution company. Any delinquent debt can drop your credit score.

Audit Process

Tax audits occur for various reasons – not necessarily because you did something wrong. An audit is the process the IRS uses to verify the numbers you include on your tax return. Each year the IRS audits about one percent of all income tax returns, reports Joy Taylor, Assistant Editor of "The Kiplinger Tax Letter". Unless you aren’t being honest about the taxable income you report, there is no reason to worry about an audit. Keep careful records throughout the year so that you can provide documentation applicable to any tax items the IRS might question. Since a credit report is a record of your borrowing, credit and repayment history and does not show your income, the IRS is not likely to request it.

Credit Report

Potential lenders and creditors are the people most apt to check your credit information – particularly when you apply for new credit. However, more employers are requesting credit reports as part of routine background checks when screening job applicants. Landlords also conduct credit checks when considering prospective. Most application forms prospective tenants are required to fill out include a consent for the landlord to check your references and credit history. According to the Fair Credit Reporting Act, only creditors, lenders, insurers, landlords and potential employers – those people who have a valid need to review your credit as part of an application process – are legally entitled to access your credit information.

Audit Triggers

A poor credit rating does not rank among IRS audit triggers. The IRS tends to look for unreported income from small business owners, the self-employed and people who receive much of their income in cash. It also compares taxpayer deductions with others in the same income bracket, paying particular attention to large discrepancies. Deductions you take for business use of a vehicle, business meals, travel and entertainment, home office and contributions to charities are other areas to which the IRS pays close attention. If the deductions you take seem unreasonable when compared to the income you indicate on your return, the IRS will likely have questions.

Federal Tax Lien

The IRS uses a tax lien as a way to collect unpaid back taxes. If the IRS attaches a lien to your property, you may find it difficult to get credit, particularly for auto and home mortgage loans. When the IRS files a tax lien, it can appear on your credit report, which will lower your credit rating. An IRS tax lien also can make it hard to sell real estate. By filing notice of a tax lien, the IRS is publicly informing all your creditors that the IRS has a claim against all the property you own, establishing itself as the highest-priority creditor. The lien must be filed in the county in which you live or where you own real estate.

References

• JK Harris & Company: FAQs
• Kiplinger; IRS Audit Red Flags -- The Dirty Dozen; Joy Taylor; December 2010
• TransUnion: All About Inquiries
• MSN Money; 6 Audit Red Flags; Jeff Schnepper; October 2010
• Internal Revenue Service; The Examination (Audit) Process; November 2007
• Tax Offices of Frederick Daily; IRS Enforced Collection – Liens and Levies; 2009
• Internal Revenue Service; File a Notice of Federal Tax Lien; June 2011