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Valor Tax Relief Team
Professional Tax Resolution Specialists
Key Takeaways
Car loans are possible with IRS debt or tax liens, but expect more scrutiny and less favorable terms from lenders.
IRS payment plans can improve your chances of approval by demonstrating financial responsibility.
Tax liens no longer appear on credit reports, but lenders may still check public records during underwriting.
Higher interest rates and down payments are typically required when tax issues are discovered.
Strengthening other financial areas like credit score and employment history can offset tax-related concerns.
If you're dealing with IRS debt or have a tax lien on your record, you might wonder whether getting a car loan is even possible. The good news is that having tax issues doesn't automatically disqualify you from auto financing. However, these financial challenges can complicate the approval process and impact the terms of your loan.
Understanding how tax liens and IRS debt affect your financing options is crucial for making informed decisions. While the process may require more preparation and potentially result in higher costs, thousands of people successfully secure car loans despite ongoing tax challenges each year.
Understanding IRS Debt & Tax Liens
What is IRS Debt?
IRS debt occurs when you owe money to the Internal Revenue Service for unpaid taxes, penalties, or interest. This debt can arise from various situations including unfiled tax returns, underreported income, disallowed deductions, or simply being unable to pay the full amount owed when filing your return.
Common Causes of IRS Debt
- • Unfiled or late-filed tax returns
- • Underreported income or business revenue
- • Denied deductions or credits
- • Failure to pay estimated quarterly taxes
- • Accumulated penalties and interest
Typical IRS Collection Timeline
- • 0-60 days: Initial notices and bills
- • 60-120 days: Final notice before enforcement
- • 120+ days: Collection actions begin
- • 1+ years: Potential lien or levy actions
What is a Tax Lien?
A tax lien is a legal claim the government places against your property when you fail to pay your tax debt. Unlike a levy (which involves actually seizing assets), a lien is a security interest that gives the IRS rights to your property as collateral for the tax debt.
Important Change: Tax Liens and Credit Reports
As of 2018, tax liens are no longer included on credit reports by the major credit bureaus (Experian, Equifax, and TransUnion). However, this doesn't mean tax liens have no impact on your ability to get credit. Lenders can still discover liens through public record searches during the underwriting process.
How Tax Liens Affect Your Financial Life
Property Rights
The lien attaches to all your property and rights to property, including any assets you acquire after the lien is filed.
Public Record
Tax liens become part of public records, which means they can be discovered by potential lenders, employers, or others conducting background checks.
Priority in Bankruptcy
Federal tax liens generally take priority over other creditors, making them difficult to discharge in bankruptcy proceedings.
Can You Get Approved for a Car Loan With IRS Debt?
Yes, you can often get approved for a car loan even with IRS debt, but the process requires strategic preparation and realistic expectations. Lenders primarily focus on your current ability to make loan payments, which means your income, employment stability, and credit score often matter more than existing tax debt.
Factors That Work in Your Favor
Active Payment Plan
Having an installment agreement with the IRS shows lenders you're actively addressing your tax debt.
Strong Credit Score
A good credit score (650+) can help offset concerns about tax debt and qualify you for better rates.
Stable Employment
Consistent employment history and reliable income demonstrate your ability to make loan payments.
Adequate Down Payment
A larger down payment reduces the lender's risk and can improve approval chances significantly.
Reasonable Debt-to-Income
Keeping your total monthly debt payments (including the proposed car loan) under 40% of income is ideal.
Co-signer Option
Having a co-signer with good credit can significantly improve approval odds and loan terms.
Potential Challenges
Enhanced Scrutiny
Lenders may require additional documentation and conduct more thorough financial reviews.
Higher Interest Rates
Tax debt can be viewed as a risk factor, potentially resulting in higher APRs.
Larger Down Payment Requirements
Lenders may require 15-25% down instead of the typical 10% to offset perceived risk.