If you file jointly and don’t pay your taxes, you’ll see the impact on both credit reports. A tax lien against you as an individual won’t show up on your spouse’s credit, but your spouse could still be affected by it.
What is a tax lien?
If you can’t pay a federal tax bill and fail to set up a payment plan, the government can try to collect the money by issuing a lien. That means it’s placing a claim on assets you own — your house, your car, your bank accounts or your business assets. Failure to pay property taxes or other state or local taxes can also result in tax liens, but the federal government has more power to come after you than other government bodies do. You can avoid a lien by contacting the IRS immediately to set up a payment plan or arrive at a compromise.
You’ve got nine months to a year before the IRS places a lien, according to Craig Smalley, a tax accountant based in Orlando. He says the lien is really just preparation for the next step — a levy, when the IRS begins to forcibly collect money from you, often by garnishing your wages.
What does a tax lien do to your credit?
When you apply to borrow money — such as with a credit card, a mortgage or a business loan — the lender wants to know that you’re likely to pay back what you owe. A tax lien on your credit reports puts that in doubt.
“Obviously, the existence of a lien messes up one’s ability to get financing,” says John Ryan, a real estate attorney based in Philadelphia.
But here’s the good news: Credit histories follow the individual, so in most cases, a tax lien against only you will not directly damage your spouse’s credit.
Your spouse may still be affected, albeit indirectly. One partner’s credit problems can make it very difficult to qualify for credit together, which can be a barrier to major life changes like buying a home. And, depending on your state’s laws, the government might be able to attach a lien to property you own together.
The rules are different in the nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Under community property, most assets and debts in a marriage are considered jointly held by both partners, so a lien against one person can usually attach to property you own together.
What’s the best recourse?
It may be wiser to keep your assets and your debts as separate as possible until the worst of the credit problems are resolved, says Dana Twight, a Seattle-based financial advisor. This will protect the partner with better credit, while both of you work together to take care of the tax lien and rebuild the credit of the spouse who is facing the lien.
“You have to have really good ground rules so one person doesn’t feel like they’re being picked on,” Twight says.
If your tax situation is relatively uncomplicated, Smalley says, you may be able to resolve it fairly easily. “If it’s just a simple thing, you owe a couple thousand dollars and you don’t have it, you call the IRS and you get on a payment plan,” he says.
But if you owe a larger amount of money, or if the situation is more complex, you may need professional advice. Smalley says a qualified tax advisor can help you understand your rights and serve as your advocate with the IRS.
A tax lien can have a strong negative effect on your credit history, and on your overall financial picture. Responding to communications from the IRS in a timely way can help you avoid a lien.
But if you do have a tax lien issued against you, contacting the IRS can help you get back the right path. Making a payment plan and sticking to it, keeping careful track of your other bills so you don’t make late payments, and gradually reducing your overall debt will all help strengthen your credit history and raise your score. Even though your spouse’s score will probably not take a hit, they’ll still be glad to see you back on firmer footing.
This article updated Aug. 26, 2016. It originally published Sept. 9, 2015.