Does Owing the IRS Affect Your Credit Score?

Janet Berry-Johnson, Author at LendingTree

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Owing money to the IRS is stressful enough without worrying it might tank your credit score. After all, unpaid debts typically show up on your credit report and drag down your score. But tax debt doesn’t necessarily follow the same rules.

Understanding how the IRS handles unpaid taxes and when tax debt might affect your credit helps you make repayment decisions and avoid bigger problems down the road.

Key takeaways

The IRS doesn’t report tax debt to credit bureaus, so paying your taxes on time doesn’t directly affect your credit score.
The IRS may send your unpaid tax debt to a private collection agency, but unlike collections from private debts, it won’t be reported to the credit bureaus.
If you can’t pay your tax bill, the IRS offers payment plans and other options to help you avoid more severe consequences.

Tax debt paid on time won’t affect your credit score

If you owe taxes and pay them by the due date, your credit score won’t take a hit. That’s because the IRS doesn’t report tax debt to the three major credit bureaus: Equifax, Experian and TransUnion. Unlike a missed credit card or loan payment, a tax bill paid on time stays between you and the IRS.

Even if your tax bill is large, as long as you pay it off by the deadline or through an approved IRS payment plan, it won’t appear on your credit report or affect your credit score. In the eyes of the credit bureaus, it’s essentially invisible.

Tax debt can indirectly affect your credit

While the IRS doesn’t report unpaid tax debt to the credit bureaus, ignoring your tax bills can still lead to serious financial consequences, including damage to your credit, albeit indirectly.

If you fail to pay what you owe and don’t set up a payment plan, the IRS may eventually assign your account to a private collection agency. The good news is that these collection agencies are not allowed to report your tax debt to the credit bureaus, so it won’t directly impact your credit.

The agency can only contact you to collect a payment or enroll you in an IRS payment plan. If you can’t afford to make payments, send a letter to the collection agency asking them to return your case to the IRS and stop contacting you. The IRS Taxpayer Advocate Service has a sample No Contact Letter you can use.

However, if you’re having financial troubles and agree to a payment plan, making payments toward your tax debt can add financial strain and impact your ability to pay other debts. Missing other debt payments, defaulting on loans or having other accounts sent to collections can appear on your credit report. And those derogatory marks stay on your credit report for seven years.

Evaluate your finances before entering into a payment plan and contact the IRS if you’re not able to afford your payments.

Tax liens can affect your creditworthiness

In addition to sending your account to collections, the IRS can issue a Notice of Federal Tax Lien. This is a public document alerting creditors that the federal government has a right to your property, including real estate, personal property and financial assets.

Tax liens used to appear on credit reports, but all three credit bureaus removed tax liens from credit reports in 2018. However, a tax lien can still affect your financial life because lenders can discover it through a public records search and consider it as part of your overall creditworthiness.

For example, say you’re applying to refinance your mortgage. The lender may search public records and finding the tax lien may raise a red flag. As a result, they may offer a higher interest rate or outright deny your refinance application.

In more serious cases, the IRS may issue a levy. A levy allows the federal government to seize funds from your bank and financial accounts, garnish your wages or seize other property, like vehicles and real estate. A levy doesn’t impact your credit report directly, but the financial disruption it causes can make it harder to keep up with other obligations that do affect your credit score.

How do I know if a tax debt is legitimate?

If you receive a call, letter, text or email about an unpaid tax debt, verify it’s legitimate before giving out any personal information or making a payment. Scammers often impersonate the IRS or collection agencies, so don’t rely solely on caller ID or a legitimate-looking email.

Before referring your account to a collection agency, you should receive Notice CP40 from the IRS and receive a letter from the collection agency. Both letters contain a taxpayer authentication number, so anyone contacting you about your tax debt should have this number.

You can also check your official IRS account at IRS.gov or call the IRS at 1-800-829-1040 to confirm whether you owe anything.

If the IRS assigned your account to a private debt collector, the agency should notify you by mail first. The IRS only works with three authorized collection agencies:

CBE Group, Inc.
ConServe
Coast Professional, Inc.

You can find contact information for these collection agencies and more information on how the process works on the IRS’s Private Debt Collection webpage.

IRS audits won’t directly affect your score

An IRS audit, while stressful, won’t directly impact your credit score. The audit itself is a review of your tax return to ensure accuracy. It’s not a debt or delinquency that credit bureaus would track. It doesn’t show up on your credit report, and the IRS doesn’t report the outcome of the audit to the credit bureaus.

However, if an audit results in additional taxes owed and you don’t pay those taxes on time, that’s where credit-related consequences come into play. If the IRS eventually sends your unpaid tax debt to collections, issues a tax lien or levies your wages or assets, that indirectly affects your creditworthiness, even if the audit itself never appears on your credit report.

The takeaway is that while audits don’t impact your credit score on their own, how you handle the outcome can.

Why you might see an inquiry from the IRS on your credit report

Although the IRS doesn’t report tax debts to credit bureaus, you might still see an inquiry from the IRS on your credit report in certain situations.

Here are a few reasons the IRS might check your credit:

You applied for an installment agreement or an Offer in Compromise, and the IRS is reviewing your financial situation, assets and ability to pay
The IRS (or one of the private collection agencies it hires) is looking for your contact information
The IRS needs to verify your identity online, and the identity verification tool works by comparing the information you submit with information on your credit report
You applied to work at the IRS, and the agency is conducting a background check

These inquiries are typically soft pulls, meaning they don’t affect your credit score, but can still raise questions if you’re monitoring your report closely. It’s a good idea to track your credit score (you can do it for free with LendingTree Spring) and look into any unfamiliar inquiries on your credit report.

What happens if you don’t pay taxes

Failing to pay your taxes leads to a series of escalating consequences beyond potential credit concerns. Initially, the IRS sends notices and assesses penalties and interest on your unpaid balance, which can add up quickly.

If you don’t arrange payment, the IRS may:

File a Notice of Federal Tax Lien
Claim your tax refunds
Levy your wages, financial accounts or other property
Revoke your passport

What to do if you can’t pay

If you can’t afford to pay your tax bill, the worst thing you can do is ignore it. The IRS offers several options:

Installment agreement. Pay your tax debt over time in monthly payments.
Offer in Compromise. Settle for less than you owe if you meet strict eligibility requirements.
Currently Not Collectible (CNC) status. If you can’t afford to pay at all, the IRS may temporarily pause collection.

Communicating with the IRS and setting up a payment plan helps avoid more serious actions.

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