Should tax debt go on credit reports?

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Do you owe the Internal Revenue Service? Chances are only you and Uncle Sam know about your outstanding tax debt.

But that might change. The IRS might one day report overdue taxpayers to the national credit bureaus.

It’s not imminent, but the Government Accountability Office, or GAO, has looked into the possibility.

In a report delivered this week to the leaders of the Senate Finance Committee, GAO researchers examined the amount and types of current tax debt and spoke with financial experts, both in the government and in the private sectors, as well as within the credit reporting industry.

The federal government’s investigative arm didn’t make any recommendations about tax debt reporting, but the numbers are intriguing.

At the end of fiscal year 2011, individuals owed $258 billion in unpaid taxes, and businesses owed around $115 billion.

The IRS ultimately can file tax liens on some of these debts. When that happens, the unpaid tax becomes public record and the debt generally is picked up by credit bureaus and included in the taxpayer’s credit history.

But the IRS can’t directly report tax debts to credit bureaus because of federal privacy laws regarding taxpayer information.

Would the threat of a tax debt going into an individual’s credit report encourage that person to pay the IRS more promptly?

Or would it, as the National Taxpayer Advocate suggests, cause some taxpayers who knew they couldn’t pay to simply not file or to file returns that didn’t correctly report what they owe the U.S. Treasury?

Should the IRS consider reporting only certain amounts of debt to credit bureaus?

The GAO found that most tax debts were relatively small. More than half of individuals and businesses with tax debts owed less than $5,000.

But when folks owe a lot, it really adds up.

The GAO report found that much of the aggregate tax debt is concentrated among those owing relatively large amounts. Debts totaling more than $25,000 add up to a total of $310 billion.

Should the IRS report only these larger amounts to credit bureaus?

Again, the GAO isn’t suggesting any particular plan of action. In fact, it raised more questions than answers, in particular noting that “the trade-offs that directly reporting tax debts to credits bureaus would entail are not well understood.”

My major concern about Uncle Sam reporting tax debt information is the same one raised about credit reports in general: How accurate is the information?

Tales of wrong credit report information and its financially disastrous results for consumers — denials of credit, employment or housing based on inaccurate negative reports — are legion.

The IRS would need to be very, very sure and have completed all appeals processes before telling Experian, Transunion and Equifax what it believes a taxpayer owes.

And what about when the debt is cleared? Will it be as difficult to erase tax debt from credit bureau records as it is to remove other dings on a credit record?

While it might be tempting to use credit reporting of unpaid taxes as a stick to collect unpaid taxes, this is much too serious of a move to make quickly.

Would the possibility of your unpaid tax bill being reported to a credit bureau prompt you to pay more quickly?

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