Does a Tax Levy Affect Your Credit Score?

A tax levy is a legal action taken by a taxing authority, such as the Internal Revenue Service (IRS) or a state tax agency, to collect unpaid tax debts. It involves the seizure of a taxpayer’s assets, including wages or bank account funds. This article clarifies whether a tax levy directly impacts credit scores and explores the broader implications of tax issues on creditworthiness.

What is a Tax Levy?

A tax levy is an administrative enforcement action initiated by a government agency to collect overdue taxes. It serves as a collection tool, typically employed after a taxpayer has failed to resolve their tax debt. The legal authority for federal tax levies is found in Internal Revenue Code Section 6331, which permits the IRS to seize property.

This action allows the taxing authority to take possession of a taxpayer’s assets to satisfy the outstanding tax liability. Common examples of assets subject to levy include money in bank accounts, wages, retirement accounts, and physical property like real estate or vehicles. The IRS can also intercept tax refunds to apply towards an unpaid tax debt.

Direct Credit Reporting of a Tax Levy

A tax levy is not reported directly to the major consumer credit bureaus, such as Experian, Equifax, and TransUnion. Consequently, a levy does not appear as a specific item on a credit report, and it does not directly impact an individual’s credit score. This is because tax levies are administrative collection actions by government agencies, rather than traditional debts or financial obligations that creditors report to consumer credit reporting agencies.

The IRS does not directly furnish information about tax debts or levies to credit bureaus. Therefore, the act of a levy being executed, such as a wage garnishment or a bank account seizure, does not create a direct entry on a credit report that would lower a credit score.

How Tax Issues Affect Credit

While a tax levy does not directly appear on a credit report, other tax issues can still influence an individual’s credit profile indirectly. Understanding the distinction between a tax levy and a tax lien is important for comprehending these indirect impacts. A tax lien is a legal claim against property to secure payment of a tax debt, whereas a tax levy involves the actual seizure of that property.

Historically, federal tax liens were reported to credit bureaus and could damage credit scores. However, major credit bureaus implemented changes starting in 2017, and by April 2018, they removed most public record data, including tax liens, from consumer credit reports. This means that current federal tax liens no longer appear on credit reports and do not directly affect credit scores.

Despite no longer appearing on credit reports, tax liens remain public records. Lenders, landlords, or potential employers may still discover these liens through public record searches, which could influence decisions regarding loan approvals, housing, or employment.

The underlying financial distress that leads to a tax debt and subsequent levy can indirectly harm credit. Struggling with tax payments might cause an individual to fall behind on other financial obligations, like credit card bills or loan payments, which are reported to credit bureaus and negatively affect scores.

If tax debt is sent to a private collection agency, that collection account may appear as a derogatory mark on a credit report. While tax liens and most civil judgments are no longer reported, bankruptcies remain the primary type of public record that can still appear on a consumer’s credit report and impact their score.