Here's What Happens to Your Credit Score if You Don't Pay Your Taxes

As of March 29, the average tax refund given out by the IRS during the 2024 filing season was $3,050. But what if you're not in line for a refund this year? What if you owe the IRS money, and you have no idea how on earth you're going to pay?

It's not such an unusual situation, and it can certainly be a stressful one. But one thing you don't want to do is ignore your tax debt, as that could have truly negative consequences. But will one of those consequences be credit score damage?

When you don't pay the IRS

The higher your credit score is, the more likely you are to get approved for a loan or credit card when you apply. Also, when you're taking on debt, a higher credit score could lead to a more favorable interest rate on the sum you're borrowing, resulting in lower monthly payments. So all told, it's in your best interest to get your credit score into good shape and prevent it from falling.

Now, the good news is that if you owe money on your taxes, it won't directly hurt or impact your credit score. The IRS doesn't report tax payment information to the credit bureaus. However, not paying a tax bill could still have negative consequences, and ones that ultimately result in credit score damage.

At a minimum, when you don't pay your taxes, the IRS assesses interest and penalties on the sum you owe. However, if you reach out to the IRS and get onto a payment plan, you can pay off your tax debt in installments. You'll still face interest charges and penalties, but the IRS will consider you current if you stick to your payment agreement.

On the other hand, if you don't pay your tax bill and make no effort to get onto a payment plan, the IRS will send you a warning letter that it may seek to garnish your wages. If you ignore it and continue not to pay, the IRS will have the right to seize a portion of your paycheck to recoup the taxes you owe. And that has the potential to indirectly affect your credit score.

If the IRS is taking away a portion of your earnings, you might fall behind on credit card or loan payments. That negative activity will then get reported to the credit bureaus, resulting in a credit score drop. And from there, you might struggle to borrow, or borrow affordably, when you need to.

A problem you shouldn't ignore

It can be stressful to owe the IRS money when you normally get a tax refund, or to owe a much larger amount than you were expecting. But the IRS is surprisingly understanding in situations like these, and there are different payment plan options you can look into. It's in your best interest to do so to avoid not just wage garnishment, but the potential to see your credit score take a dive.