Congress considers allowing IRS to report unpaid taxes to credit bureaus

The Government Accountability Office, or GAO, issued a report to federal lawmakers on the potential benefits and costs of allowing the Internal Revenue Service to report unpaid taxes to credit bureaus. While at face value this may seem like a good way to collect the billions of dollars owed to the federal government in back income taxes, doing so may have several costly negative implications for both the government and individual Americans.

Scope of the problem

In 2011 alone, American individuals and businesses owed the federal government $373.2 billion in unpaid income taxes. While most unpaid taxes owed by individuals are valued at $5,000 or less, the number of debts over $25,000 total $310 billion and some cases alone are worth up to $100 million. Overall, individual filers owed $258 billion in 2011, while businesses owed $115 billion in unpaid income taxes.

Current law prohibits the IRS from reporting unpaid tax debt to credit bureaus in an effort to protect the privacy of taxpayers, but does allow the agency to place a lien on property of individuals and businesses who owe unpaid taxes. These liens are public knowledge and may be reported by credit bureaus.

Benefits of reporting unpaid taxes

The GAO report identified some advantages to the IRS reporting unpaid taxes. First, the GAO believes knowledge that unpaid taxes will show up on credit reports will prompt those who owe taxes to pay up. Potentially, this could flood the federal government with billions of dollars owed in unpaid taxes. Although not good for individuals who owe taxes, the GAO also suggests that reporting unpaid taxes to credit bureaus would benefit creditors by painting a more realistic picture of an individual's financial history.

Costs of reporting unpaid taxes

Despite these potential benefits, the GAO could not say for sure that allowing the IRS to report unpaid taxes would indeed lead to more revenue and reduced costs for the agency. For example, instead of prompting those who owe taxes to pay, threatening to report unpaid taxes may provoke them to not file an income tax return at all.

A more significant concern is about the accuracy of credit reports. Presently, it is common for mistakes to show up on credit reports that negatively impact credit scores. It can be very difficult for individuals to get these mistakes corrected. If a mistake is made in the reporting of unpaid taxes, for example, and someone is in the process of repaying the debt but the entire amount owed shows up on their credit report, it may be very difficult and costly to have the mistake corrected.

Fixing inaccurate reports of unpaid taxes could increase costs for the IRS, which would need to hire additional staff to deal with complaints and address appeals.

Possibility of middle ground

The GAO's report also mentions possible compromises between reporting all unpaid taxes or none at all. The agency believes the IRS may benefit from reporting unpaid taxes above a certain amount to credit bureaus while letting smaller debts go unreported. Another possibility is to have the IRS complete the appeals process with individuals who owe unpaid taxes before reporting these debts to credit bureaus.

The GAO's report is just a look into the possibility of the IRS reporting unpaid taxes and not a strong recommendation to do so. However, any action on the part of Congress would likely have significant implications for those who owe the federal government taxes. If you have a tax problem, please contact an experienced tax law attorney who can help resolve your IRS concerns.