Having lived abroad for 15 years, I've returned to the US almost 1 year ago and am preparing to buy a house via a mortgage. Naturally, I'd like to get favorable rates. I face a couple of challenges though:

  1. I have a size-able debt with the IRS and have made repayment arrangements with them via their Form 9465.
  2. Having been out of the country for so long, I had almost nothing on my credit history, despite having multiple mortgages, auto loans and credit cards before moving abroad.

First thing I did upon repatriation was to buy a new car. This was in part to re-establish a credit history. It was a 6-year note, I paid it off today, in only 11 months. I also got a couple of credit cards. So far, so good, my credit score as of today is 700.

I worry that paying off my auto loan will actually hurt my score because now, I have no installment accounts that are active. I do use 2 credit cards though.

So, I wonder if it would serve me better to ask a bank for a loan for the IRS debt, and make payments to a bank instead of the IRS.

One more important factor here is that due to point no. 2 above, I had to shop around a little for the auto loan and due to this, I have now 9 credit inquiries already against my credit reports. So, I worry that moving the debt to another institution will lower my score by virtue of adding another credit inquiry.


To summarize, I'd like to continue building a good credit score to give me the best mortgage options in a 9-12 month timeframe. Given the scenario above, does it make sense for me to keep paying the IRS, or get a loan from a bank, possibly adding a harmful credit inquiry or two to my credit records?


1 Answer 1


As answered in comments, the IRS does not consider itself a lender and does not report to the credit bureaus payments of tax debt by an installment agreement, or by any other means including driving a truckload of pennies to a (so-called) Taxpayer Assistance Center if you can get to one that hasn't been closed due to budget cutbacks. So yes getting a bank loan and paying that is better from a credit report point of view.

But there's a related factor that may not have affected you but does affect many people in this situation. When you owe and don't pay taxes, the IRS can file a lien notice (formally a Notice of Federal Tax Lien = NFTL). Because there is some adminstrative cost, in practice they actually do this only over a threshold (I believe currently $10,000, but it changes from time to time), after some delay (about a year), and not if you make alternative arrangements such as the installment agreement. The lien notice is filed in the courthouse for the place you live, so when you were abroad they probably couldn't do so even if you otherwise met the criteria.

If/when a Federal tax lien notice is filed, it goes on your credit report and hurts your score/rating. If for example a bank did give you a mortgage and you defaulted and they foreclosed, the IRS gets first dibs on the sale proceeds, substantially increasing the risk the bank loses money. Unsurprisingly the bank does not much like that idea.

See https://taxpayeradvocate.irs.gov/get-help/liens for a good summary and useful links.

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