Here’s a scary thought, especially if you owe back taxes: What if the Internal Revenue Service reported your payment history to the big national credit bureaus?
Unlike many other debts owed to the federal government, unpaid taxes are not reported to credit bureaus. The IRS is not allowed to directly share this information because of federal privacy laws.
Of course, Congress could always change the law to allow the IRS to directly report all delinquencies to the credit bureaus. No one has proposed making this change, but last year the Senate Finance Committee did ask the General Accounting Office to look at the issue.
The GAO did not make any recommendations in its report released in October, but it did list arguments for and against the idea. It also provided some hard numbers about the staggering amount of money owed to the federal treasury in unpaid taxes.
As of October 2011, about $343 billion was owed in unpaid federal tax debts. That’s more than the federal deficit of $207 billion for the 2012 budget year. Most of the outstanding debts are relatively small –less than $5,000.
Some tax information does make it to the credit bureaus. When the IRS files a tax lien to collect back taxes, that information is public record and can be picked up by credit reporting agencies. The GAO found that liens have been filed for more than half of all the dollars owed in tax debts.
Why change the current system?
Simply put: the possibility of more revenue.
If this information were reported to the credit bureaus it would have an effect on credit scores and that might change behavior. Some people might be encouraged to pay their taxes on time or pay off existing debts to improve their credit scores.
It might also provide another way to enforce the tax code. Anyone who owed more than a certain amount of back taxes could be barred from receiving certain benefits, such as government contracts, grants or loans.
Would this really make a difference? According to the GAO report there’s no way to be sure.
“Some taxpayers have agreed to installment agreements, so reporting their debts many not influence their willingness to pay because they are already making payments. IRS classifies other debts as uncollectible, and reporting those debts many not make the debts any more collectible.”
There’s also the belief that providing tax payment history to credit bureaus would give potential lenders a more complete – and possibly more accurate – picture of the person or business applying for credit.
Under the current system, the credit reporting agencies know the dollar amount of a tax debt when a lien is filed. They don’t know if the debt grows because of penalties and interest. They don’t know when it’s reduced as the amount owed is paid down.
Direct reporting, supporters say, would provide more current information which would give the taxpayer an incentive to pay off the debt because the declining balance would improve their credit history.
The GAO did offer this caution: reporting tax payment information on an ongoing basis could increase the risk that negative information shows up in a person’s credit file twice.
Would it really make a difference?
The General Accounting Office did not come to a conclusion on that.
It noted that such a system could cost the IRS money because it would have to handle transmission of information to the credit bureaus and deal with taxpayer inquiries and disputes.
“Taxpayers would be forced to either dispute the inaccurate information to have it corrected or face possible serious consequences such as denial of credit, employment, or housing due to the inaccurate negative information on their credit histories. IRS would incur additional costs as it would have to respond to related inquiries and disputes.”
The GAO report also included a caution from the National Taxpayer Advocate that full reporting could result in some people choosing not to file tax returns – or to file inaccurately – if they know they owe money to the IRS.
The credit reporting industry hasn’t taken a position on this idea. And since nothing has been proposed, consumer groups haven’t really focused on the issue.
Chi Chi Wu, staff attorney for the National Consumer Law Center said her main concern was the potential harm that could be caused by reporting errors.
“Would tax debts show up in the wrong credit reports?” she asked. “I’d be concerned that adding a whole new batch of data would increase the number of errors credit bureaus make and how difficult it can be to get them fixed.”
Wu noted that American taxpayers share some very private and confidential information with the IRS and in return Congress prohibits the IRS from sharing that information.
“If that bargain is going to be changed,” Wu said, “we want to think long and hard about why and how it would be changed.”