Tax debt won’t hurt or affect your credit score directly. Actions taken by the IRS to recover the debt you owe may hurt your credit indirectly.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Fortunately, tax debt may not hit your credit report right away. With careful management, you may be able to avoid damaging your credit if you pay before the bill goes into collections.
The IRS doesn’t report unpaid taxes, late taxes or missed payments to any of the three credit bureaus. This means what you owe to the IRS doesn’t show up in your credit report or affect your credit score. The Taxpayer Bill of Rights, which includes the right to privacy and confidentiality, governs how the IRS handles your private data.
But the IRS can hire a collection agency to collect on your debt, and the collection activities may show up on your credit report.
Or, if the IRS takes legal action, like garnishing your wages or levying your bank account, this won’t directly lower your credit score, but the financial strain could lead to missed payments on other debts (like credit cards or loans), which would damage your score.
A tax lien is an official legal claim filed by the IRS for unpaid taxes. The IRS typically doesn’t file tax liens for small tax debts, but it may be a concern if you owe more than $10,000.
After a tax lien is filed, the IRS can seize your assets if you don’t pay the debt. This asset seizure is called a tax levy. Unlike a Chapter 7 bankruptcy, in which seized assets are reported to credit bureaus, tax debt levies don’t show up on your credit report.
Prior to April 2018, tax liens were reported to credit bureaus. Currently, the IRS doesn’t report tax liens, and liens incurred prior to that date were removed from credit reports.
If the IRS sends your tax debt to collections, a private collection agency takes over. Since 2021, the IRS is required to use private collection agencies to collect unpaid back taxes. Debt collectors may work with you to develop a payment plan for your tax debt.
Debt sent to a collection agency does get reported to the three credit bureaus. This negative mark stays on your report for up to 7 years. Having a history of debts sent to collections, including tax debt, could prevent you from getting a mortgage or personal loan later.
Collections activity on your credit report might also affect your ability to access credit lines or loans with lower interest rates.
If the IRS garnishes your wages, they take a portion of your paycheck to repay your tax debt. Before this happens, they send a Final Notice of Intent to Levy, giving you 30 days to respond.
If you don’t take action, they notify your employer, who is legally required to withhold part of your wages and send it to the IRS. The amount taken depends on your filing status and dependents, but they leave you with only a small exempt portion. Garnishment continues until the debt, including penalties and interest, is fully paid.
No. If the IRS garnishes your wages to pay off tax debt, it does not directly impact your credit score because the IRS does not report wage garnishments to credit bureaus.
If the IRS levies your bank account, they legally seize funds to repay your tax debt. Your bank must freeze the levied amount and hold it for 21 days before sending it to the IRS. This waiting period allows you to resolve the issue by paying the debt, setting up a payment plan, or proving financial hardship.
If no action is taken, the bank releases the funds to the IRS, and the process can repeat until the debt is fully paid. Unlike wage garnishment, a bank levy can drain your account, potentially causing overdrafts and financial hardship.
No. An IRS bank levy does not directly impact your credit score because the IRS does not report levies to credit bureaus.
Making a plan to pay off your IRS tax debt is the first step to getting your finances back in order. The IRS offers a few tax relief options if you truly can’t pay the entire debt. Here’s a step-by-step guide to paying off IRS tax debt.
Take a realistic look at your overall finances and determine what expenses can be trimmed to pay off your tax debt. You might be able to reduce your grocery bills by planning meals or turn off streaming services for a while.
If you qualify, you may be able to apply for an IRS Offer in Compromise (OIC) and have your tax debt reduced. Criteria used to determine if you qualify include:
The IRS offers payment plans for people who don’t qualify for an OIC. Short-term and long-term payment plans may be available, depending on your income. You can apply online to see if you qualify for an IRS payment plan.
An abatement removes penalties and fees from the amount you owe. First-time abatement relief may be available if you have a good history of paying taxes on time. This process doesn’t remove the original debt.
Selling off some of your existing assets or taking on a second job could be a way out of tax debt. Avoid selling assets you truly need, like your primary home and the vehicle you use to drive to work. If you’re unable to pay the debt without selling important assets, you may qualify for an OIC.
Tax debt can affect your overall finances and cause stress in your life. The team at Lexington Law can help you work on your credit. To see a free summary of your credit, sign up for a free credit assessment.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
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