Does Owing the IRS Affect Your Credit?

Many people wonder if owing the Internal Revenue Service (IRS) will harm their credit score. While the IRS does not directly report tax debt, there are several indirect ways unpaid taxes can impact a person’s financial standing and creditworthiness.

Direct Reporting to Credit Bureaus

The Internal Revenue Service (IRS) does not directly report tax debt information to the three major consumer credit bureaus: Equifax, Experian, and TransUnion. Unlike traditional creditors such as banks or credit card companies, the IRS operates as a government tax collection agency and does not participate in the standard credit reporting system. This means that simply owing taxes, or even entering into a payment plan with the IRS, will not appear on your credit report. The IRS is also restricted from sharing your personal tax information with third parties due to federal privacy laws.

Understanding Federal Tax Liens

A federal tax lien is a legal claim the government places on a taxpayer’s property when a tax debt remains unpaid after a demand for payment. This claim secures the government’s interest in assets like real estate, vehicles, and financial accounts.

Historically, before April 2018, federal tax liens were reported to credit bureaus and could significantly damage a person’s credit score. However, in April 2018, the three major credit bureaus removed all federal tax liens from consumer credit reports. This means that new and existing federal tax liens no longer appear on credit reports and do not directly influence credit scores.

Despite their removal from credit reports, federal tax liens remain public records. Lenders, landlords, and other entities can still discover these liens through public record searches, which may influence their decision-making processes for loans or other financial applications.

How Tax Debt Can Indirectly Affect Your Credit

While the IRS does not directly report tax debt to credit bureaus, owing the IRS can still indirectly impact a person’s credit. The most common indirect effect arises from the financial strain caused by tax debt, which can lead to missed payments on other financial obligations. If funds are diverted to cover tax liabilities, a taxpayer might fall behind on credit card bills, mortgage payments, or auto loans. These missed payments are reported by traditional creditors to credit bureaus and will directly harm credit scores.

The existence of unpaid tax debt can also increase an individual’s overall debt load. If a person uses high-interest credit cards or personal loans to pay their tax debt, this can increase their monthly financial obligations and potentially signal higher risk to lenders. If a tax debt is assigned to a private collection agency, these agencies are typically not permitted to report tax debt to credit bureaus. However, the mere presence of a collection account can sometimes be a source of concern for consumers.

IRS Collection Actions and Consequences

When tax debt remains unpaid, the IRS can take various enforcement actions beyond placing a lien. These actions, known as levies, permit the IRS to legally seize a taxpayer’s property or assets to satisfy the debt. Common levy actions include seizing funds from bank accounts or garnishing wages.

While these specific IRS actions do not directly appear on a credit report, they are severe indicators of financial distress. The immediate loss of funds or income due to a levy can make it impossible for a taxpayer to meet other financial obligations, leading to missed payments on accounts that do report to credit bureaus, thus indirectly harming credit scores.

Options for Resolving Tax Debt

Taxpayers facing unpaid tax liabilities have several options to resolve their debt with the IRS, which can help prevent more severe collection actions and mitigate indirect credit impacts.

Installment Agreement

This allows taxpayers to make monthly payments over an agreed-upon period, typically up to 72 months. Establishing such a payment plan can prevent the IRS from pursuing levies or filing new liens.

Offer in Compromise (OIC)

This allows certain taxpayers to settle their tax debt for a lower amount than what they originally owe, if they meet specific financial criteria.

Currently Not Collectible (CNC)

For those experiencing significant financial hardship, the IRS may classify their account as Currently Not Collectible (CNC). Under CNC status, the IRS temporarily delays collection efforts, though interest and penalties continue to accrue.

Pursuing these formal resolution paths helps taxpayers manage their financial situation, avoid aggressive IRS actions, and protect their credit from the indirect consequences of unpaid taxes.