Does the IRS Check Your Credit Report?

The average taxpayer doesn’t need to worry about their credit history report being seen by the Internal Revenue Service. The agency doesn’t typically access credit reports to learn more about taxpayer income. However, there are circumstances where a credit report may be checked in order to learn more about a taxpayer’s spending compared to reported income.

Each year, the IRS singles out about 1 percent of tax returns for audit. The audit process involves a deeper examination of a taxpayer’s financial statements, receipts, pay stubs and previous tax returns. Some returns are randomly chosen for audit, while others have raised red flags like unreported income or questionable deductions. For individual taxpayers, declaring business expenses above the average for the taxpayer’s profession is one of the biggest audit triggers.

The majority of IRS audits are caused by mistakes on a return or missing documentation. These are conducted completely by mail. More thorough audits require an examination at an IRS office. The most complete audits, known as field audits, include visits to a taxpayer’s home and business by IRS agents to look at financial records. Many people who are being audited hire a tax attorney or certified public accountant to represent them or provide consulting during the audit.

Not all audits result in additional taxes owed. When a deficiency is found, interest will accrue from the time the tax was originally due until it’s paid off. An audited taxpayer may also be liable for additional penalties or even criminal prosecution, depending on the reasons for underpayment of taxes.

In the course of doing an audit, the IRS may perform what’s known as a soft credit check. According to IRS Notice CP01B, an audit may include the use of a third-party credit reporting company that takes information from a taxpayer’s credit report and generates questions for the IRS to ask during the audit. This causes an entry known as a “soft inquiry” to be added to the reported, attributed to the U.S. Treasury Department.

The IRS emphasizes that soft inquiries are done through a third party and that the IRS itself will not access a taxpayer’s credit history. Although the taxpayer may see the soft inquiry when looking at his or her credit report, it won’t be reported to lenders. According to the IRS, the soft inquiry action will not impact the taxpayer’s credit score. An IRS soft inquiry on a credit report is generally removed after two years.

Prior to 2018, a taxpayer’s credit report would indicate if the IRS had filed a Notice of Federal Tax Lien because the taxpayer has failed to pay taxes. This lien serves as a legal claim against the taxpayer’s property and gives the IRS priority above all other creditors. It doesn’t allow the IRS to seize the property, but the lien makes it very difficult for the taxpayer to sell it.

The IRS is restricted from sharing a taxpayer’s personal information. It did not report tax liens to credit report companies in the past, but they were added to credit reports because they are public records. Since April 2018, the three major credit reporting bureaus have agreed to no longer include Federal Tax Lien information on consumer credit reports.

Even though a Federal Tax Lien is no longer published in a taxpayer’s credit history, it remains in effect until the debt is paid or a payment plan has been arranged with the IRS. According to H&R Block, many credit card companies and other lenders as well as potential employers and landlords have access to Federal Tax Lien data. It’s important to pay off the tax debt or set up a payment plan as soon as possible to remove the lien. An IRS payment plan does not have any impact on a taxpayer’s credit score, according to the IRS.