Tax Liens and Credit Reports

Allison Martin
tax lien

When you become delinquent on a tax debt, the government may place a lien on your property. Unfortunately, a tax lien can have serious negative implications for your credit.

Impact of Tax Liens On Your Credit Score

When a Notice of Federal Tax Lien is filed by the Internal Revenue Service (IRS), creditors are notified that the government has a right to property you legally possess. The credit bureaus then classify it as an adverse public record in your credit profile.

Tax liens can tank your credit score by several points, but the actual amount of the decrease varies by consumer and depends on the other contents of their credit report.

How Long Does a Tax Lien Stay on Your Credit Report

Most negative items, like collection accounts and bankruptcies, disappear from your credit report after seven or 10 years, even if you still owe. However, "Paid tax liens remain on file for seven years from the date released [and] unpaid tax liens remain on file indefinitely," according to myFICO.

Federal Versus State Tax Liens

Tax liens can be assessed at the federal and state level, but the key differentiator lies in the withdrawal and removal process.

Federal Tax Liens

In 2011, the IRS unveiled the Fresh Start Program to assist taxpayers who owe the IRS. Under the program:

  • Federal tax liens can be withdrawn after tax debts are paid, and certain requirements are met. You must complete and submit IRS Form 12277, Application for Withdrawal.
  • Federal tax liens can be withdrawn if you enroll in a direct debit installment agreement. Complete and submit IRS Form 12277, Application for Withdrawal, to apply for consideration.
  • Taxpayers who owe $50,000 or less can avoid a federal tax lien by enrolling in direct debit payments for up to six years. To apply, complete IRS Form 9465, Installment Agreement Request.
  • Taxpayers who owe more than $50,000 can avoid a tax lien by applying for an installment agreement using IRS Form 9465, Installment Agreement Request.

Most importantly, you can have the lien removed from your credit report before the standard reporting window of seven years.

State Tax Liens

Once you pay your tax obligation in full, the lien will be removed from the property. However, the public record will still remain on your credit report for seven years unless your request for a removal is granted.

How to Get a Tax Lien Removed from Your Credit Report

Take the following actions to request a removal of a state or federal lien from your credit report:

Step 1: Retrieve your Credit Report.

Review the tax lien information to confirm the amount is accurate. If not, file a formal dispute using the instructions found here.

Step 2: Contact the Reporting Agency.

Initiate contact to inquire about repayment options that may be available to you. Also, ask about the possibility of having the lien removed once the balance is paid in full.

Step 3: Eliminate the Balance.

Most state agencies will not consider a tax lien removal unless this pertinent step is executed.

Step 4: Request a Removal in Writing.

Contact your state's tax office, but be mindful that the process and policies vary by state. To learn more about IRS Lien Notice Withdrawals and how to move forward, visit the IRS website.

How to Qualify for Credit Accounts With a Tax Lien

You may still be able to qualify for a loan or credit card with a tax lien. However, the application process may be much more stringent. Also, you will only qualify for debt products with significantly higher interest rates and possibly be required to make a hefty down payment on loan products as a result of your damaged credit rating.

Tax Liens and Credit Reports