The Government Accountability Office recently issued a report in which it detailed the benefits and drawbacks of allowing the Internal Revenue Service to tell credit bureaus about consumers who fail to pay their taxes. An existing law aimed at protecting taxpayer privacy keeps this ability outside of the power of the IRS, but Congress could abolish this protection in light of the GAO report. Such a move could potentially damage the credit scores of thousands of people in Texas and across the U.S.
According to the GAO, individuals and businesses collectively owed around $373.2 billion in back taxes as of 2011, with some taxpayers having failed to pay more than $100 million. The report notes that allowing the IRS to report these liabilities to credit bureaus would provide creditors with more accurate details about their borrowers and could scare some delinquent taxpayers into settling their debts.
However, the report also cites the National Taxpayer Advocate, which explains that the enforcement of such a rule could encourage some individuals to file inaccurate returns or not file returns at all when they discover that unpaid taxes could hurt their credit scores.
Furthermore, the GAO said that issues of accuracy on the side of the credit bureaus and the IRS could also complicate matters. A GAO audit of the IRS in 2011 found that the agency suffered from repeated delays and errors “in recording taxpayer information, payments and other tax assessment-related activities.”
If these errors lead to bad information being reported to credit bureaus, some taxpayers could face severe repercussions, including “denial of credit, employment or housing due to the inaccurate negative information on their credit histories.” The GAO said this could also hurt the IRS, which would then have to deal with an increased number of disputes and inquiries regarding such errors.
Source: Baltimore Sun, “Should the IRS report unpaid income taxes to credit bureau?” Ellen Ambrose, Oct.15, 2012