It’s a taxpayer’s nightmare. You go to pick up your paycheck and discover the Internal Revenue Service got there first and has taken most of your money to pay back taxes. This is what a tax levy does. Tax levies don’t directly affect your credit score. However, levies are part of the IRS collection process and the indirect effects can damage your credit for years.

The Power to Levy

Congress has given the IRS a broad range of tools to collect taxes, including the power to garnish or levy wages. This means that if you owe back taxes and ignore IRS bills and other less drastic collection efforts, the IRS can force your employer to hand over the bulk of your paycheck without taking you to court. The power to levy isn’t limited to wages. The IRS can take money out of your bank accounts, apply tax refunds to past due taxes and garnish Social Security checks. Property isn’t immune to levies. The IRS can seize and sell real estate, cars and other assets to collect unpaid taxes.

Levying Your Pay

The IRS won’t spring a levy of your wages on you without warning. Taxpayers get a notice of intent to levy at least 30 days before action is taken. If the IRS does garnish your paycheck, it won’t go on your credit report. The IRS isn’t allowed to report delinquent taxpayers to the credit bureaus. You also won’t lose your job if this happens once because the Consumer Credit Protection Act prohibits employers from firing workers over a first-time wage garnishment. This protection does not extend to additional wage levies, however.

Levies and Your Credit Score

An IRS wage levy may not cause direct damage to your credit score, but there may be side effects. Suppose you suddenly find yourself with a garnished paycheck because of a levy. You could be late paying your credit cards, car payment or mortgage. Late payments go on your credit report and stay there for seven years. To make matters worse, an IRS levy may be preceded by a tax lien if you owe more than $10,000. Tax liens are not levies, but court filings that make your debt to the IRS a public record. Credit bureaus monitor public records and will put the lien on your credit report, where it will stay for at least seven years. This can drop your credit score by up to 100 points on top of any late payments on other accounts that follow.

What to Do

If you find yourself short on funds and can’t pay a tax debt, or you get a notice of intent to levy, get in touch with the IRS immediately. Pay as much as you can to keep interest and penalty charges to a minimum. The IRS generally will give you 120 days to pay the balance you owe. If that’s not enough time, you can file Form 9465 to set up installment payments for up to 72 months. As long as you make the payments you agree to, the IRS won’t levy your wages or other assets and won't file a lien, so your credit record will be safe.