Dear Creditnet: I've procrastinated filing my income tax return and just found out from my CPA that I'll probably owe a lot more than expected this year.
I know I'll have to pay penalties and interest if I file an extension and fail to pay what I owe in full by the 17th, but can paying taxes late hurt my credit scores too? I want to buy a home later this year and simply can't risk hurting my credit.
-Harold from NJ
Answer: Filing an extension will give you until October 15th, 2012 to file your tax return, but the extension won't give you any more time to pay what you owe Uncle Sam. As you mentioned, if you file an extension on time yet fail to pay your tax liability in full, you will have to pay penalties and interest on the unpaid balance.
However, your late payment of taxes will not result in an immediate ding to your FICO credit scores. That is, as long as you avoid the IRS placing a tax lien against you at some point in the future in order to collect on your unpaid tax bill.
If your tax debt isn’t paid in full, the federal government could eventually file a “Notice of Federal Tax Lien” against your property. Tax liens are public record, which means they will be reported to the major credit bureaus and will significantly damage your credit scores while remaining on your credit reports for up to seven years.
To avoid dealing with a potential tax lien and its harmful effects on your credit reports and scores, make sure you file an extension with the IRS on time, make a payment based on your estimated tax liability, and then make payment in full along with your final tax return before October 16th, 2012.
While you'll have to pay some interest and penalties for not paying what you owed the IRS in full by April 17th, your credit scores will remain completely unharmed.