Does Having a Tax Debt Levied Against You Affect Your Credit Score?

The only way that the Internal Revenue Service files a tax lien or levy against you is if you are seriously delinquent on your taxes. If you're in a financial position where you can't afford to pay your taxes, you're probably already delinquent on other loans as well, such as credit cards, and your credit score has already fallen. Your score may decrease even more after an IRS lien or levy.

Tax Liens and Levies

If you receive notice of an IRS lien or levy, it means the IRS is taking direct action to recoup some or all of the tax debt you owe. A lien is a claim against your personal property. If you ever attempt to sell or otherwise dispose of property with a lien against it, the IRS gets its share out of the proceeds before you receive anything. The IRS can't generally remove a lien until you satisfy your outstanding debt. An IRS levy is an even more direct assessment than a lien, as a levy authorizes the IRS to physically take money out of your bank accounts, wages and income tax returns. A levy may even allow the IRS to seize your property and sell it to pay your tax debt. All of these actions are part of the public record, meaning they can appear on your credit report.

IRS Actions and Credit Report

Because a lien and a levy may both appear on your credit report, your score usually suffers if the IRS assesses either against you. IRS actions such as tax liens may have an even more negative effect on your credit report than other negative items, such as late payments, as an unpaid IRS lien remains on your credit report for a full 15 years. Negatives typically last only seven to 10 years. Even after you pay a tax lien, it remains on your credit report for an additional seven years.

Bankruptcy and Taxes

You can avoid having to pay a number of debts by filing bankruptcy --- tax debts are one of the main exceptions to this rule. Except in the limited case of certain tax debts at least three years old, even if you receive a bankruptcy discharge, you have to pay back the IRS. If you manage to discharge your tax debts, the notation of your IRS lien or levy still remains in your credit report for an additional seven years. Coupled with your bankruptcy filing, the IRS levy continues to weigh down your credit score.

Avoiding Liens and Levies

Although the IRS may be persistent in its pursuit of back taxes, like any creditor, its main goal is to get paid. If you can't afford to pay your taxes, you may be able to file an installment agreement with the IRS to pay your back taxes over time. One of the main advantages of an installment agreement is that it doesn't appear on your credit report, so it doesn't damage your credit score as an IRS levy would.