How does a tax lien affect your credit?
Tax liens have serious consequences and not just for your credit. An unpaid tax lien can lead to tax levies – where the government comes in and seizes your property to satisfy your tax debt.
This means you could lose your bank accounts, your car, or even your home if the tax debt is large enough.
How long does a tax lien stay on your credit report?
A paid tax lien remains on your credit report for seven years from the date it was filed. However, an unpaid tax lien can remain indefinitely and have a lasting impact on your credit score.
Understanding Tax Liens
Tax liens are similar to judgments on your credit report in that they are a legal remedy for your creditors to collect money from you. However, with a federal tax lien in place, the IRS establishes that they have a legal right to your property. This includes:
- Real estate you own – houses, land, etc.
- Personal property – your cars, jewelry, etc.
- Business property – any business property as well as accounts receivable (if you own a business)
- Financial assets – your bank accounts, retirement accounts, etc.
Having a federal tax lien makes it impossible to sell your home or qualify for new credit. It takes precedence, so when you try to sell your home, part of the purchase price has to be used to satisfy the lien – a deal that few buyers will agree to.
Creditors see it as a serious red flag on your credit report and in your ability to repay. This is because tax liens can easily turn into levies, and the IRS has already established that it is “first in line” to collect. So creditors know that they won’t have much recourse if you default in the future.
Your credit score will drop significantly, and the better your credit was before the lien, the worse it will be afterward. It is not uncommon to see drops of 80-100 points or more in your credit score.
The damage can be difficult to undo because, unlike consumer credit accounts, an unpaid tax lien remains on your credit report indefinitely. The longer the debt goes unpaid, the greater your risk of being levied and having your property and assets seized.
How Tax Liens End Up on Your Credit Report
The IRS files the tax lien that ends up on your credit reports. However, they don’t directly report to any of the three credit bureaus; Equifax, Experian, and TransUnion.
Tax liens appear as a matter of public record in the same way that bankruptcies and judgments do. Because of this, removing a tax lien from your credit reports requires dealing with both the IRS and the credit reporting agencies.
You will usually only be informed of the tax lien once it has already been placed on your credit report. Generally speaking, the IRS will only send you a notice demanding payment.
If you don’t follow up on time, they will file what is called a Notice of Federal Tax Lien. At this point, unless there are errors – in the amount you owe, the way the tax lien was filed, etc. – you are stuck with it on your report indefinitely as long as it is unpaid.
Even filing for bankruptcy will not discharge a federal lien. The only way to avoid a tax lien through bankruptcy is to file before the lien is attached, but bankruptcy presents its own set of credit problems and will damage your credit as well.
How to Remove a Tax Lien from Your Credit Report
Tax liens are subject to the same Fair Credit Reporting Act (FCRA) laws that govern all debts. You can dispute them, and if the government cannot prove that you owe the debt, the credit bureaus will remove the tax lien from your credit report.
The government is less likely to ignore a dispute based on erroneous information, especially when the debt is substantial. What most often happens is that the IRS will confirm or update the information, and you’ll still be stuck with the tax lien on your credit history.
If you pay the tax debt in full, the IRS will “release” the tax lien, but the released lien still gets reported for seven years after you make payment in full.
Fortunately, it is possible to dispute and remove a tax lien even when it hasn’t been paid in full. Here’s an example of tax liens that were disputed and deleted from a TransUnion report:
To do this, you have to request a specific remedy known as a “withdrawal.” This is different from having a tax lien “released” after payment has been completed. You can even request a withdrawal while you are still making payments on the lien.
The only catch is that you have to pay the amount in full. The IRS won’t withdraw a federal tax lien for settlement offers, and you must keep up with the payment plan or installment agreement.
Despite having to pay the total amount over time, this can be an attractive option when you need to qualify for new credit or sell your home and must have all tax liens cleared.
Filing a Withdrawal Request
Getting federal tax liens removed from your credit reports requires filing a specific withdrawal request on IRS form 12277. From there, you will still need to follow up with the credit bureaus as the IRS will not notify them that the tax lien has been withdrawn.
That means that you will have to coordinate with the IRS and all three credit reporting agencies to ensure that the tax lien has been removed.
Withdrawals may also be possible for older tax liens that have already been paid off. Still, again you will need to follow the same process of dealing with the IRS and credit reporting agencies separately.
Because the IRS does not coordinate with the credit bureaus the way typical creditors do, it can prove both frustrating and confusing for the average consumer.
Plus, if you aren’t very familiar with tax laws, it’s easy to find yourself dealing with a release versus a withdrawal – which leaves you with fewer options to restore your credit score.
Working with a Professional Credit Repair Company
In these situations, it’s often best to work with a professional that understands tax liens and how best to proceed in your particular case. So if you have a tax lien on your credit report and aren’t sure exactly how to go about removing them, there is help.
Get in touch with our team of credit repair professionals and let them deal with the back and forth with the credit bureaus for you. They can help you improve your credit score and have peace of mind knowing that you have the best chance of getting it removed.
Remove Your Tax Liens Now!
If you’re ready for a fresh start, let the professionals at Lexington Law Firm take care of it for you.
They can delete all kinds of negative items from your credit reports, including bankruptcies, foreclosures, repossessions, charge offs, judgments, tax liens, collections, late payments, and more.