What Happens When a Tax Lien Appears on Your Credit Report?

Jill Bridges
Expert Contributor
Last Updated:
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  • Tax liens issued by the IRS may eventually appear on your credit report and can damage your credit score.
  • If a tax lien appears on your credit report, it will remain until you’ve paid your back taxes and made a request for the lien to be withdrawn.
  • After a lien is released, you can file a dispute with the three major credit bureaus to clear the lien from your credit report.

If you owe money to the IRS and haven’t made any efforts to pay your back taxes, you could possibly face a tax lien. Essentially, a tax lien gives the U.S. government the right to seize your personal property to cover your debts. The government can seize the assets in your bank account, along with your car, and your home.

In addition to placing your personal property at risk, a tax lien can also appear on your credit report. A lien on your credit report can lower your credit score and put your financial future at risk.

Find out what you should know if a tax lien appears on your credit report, and learn how you can clear the lien with help from an experienced tax attorney.

Tax Lien Status

Before you learn how a tax lien can impact your credit report, you want to understand the different tax lien statuses.

What Happens When a Tax Lien Appears on Your Credit Report?

If a tax lien is listed as unpaid, this status means that the IRS has issued a lien, but your debts have not yet been paid. A tax lien with an unpaid status will stay on your credit report in perpetuity: It will continue to impact your credit score until you clear your debt.

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When a tax lien has a released or paid status, your debts have been repaid and the IRS has released the lien. Unfortunately, even though you no longer owe the IRS money, the lien itself will not automatically disappear from your report. After your lien has been released, it may take up to seven years before it will not be reflected on your credit report.

Finally, a withdrawn tax lien is one the IRS has removed from the public record. These tax liens do not show up on your credit report and do not pose a risk to your credit score.

Credit Agencies and Tax Liens

Tax liens are not immediately reported to credit agencies after they have been issued. Neither the tax authority in your state nor the IRS will notify credit agencies of your lien.

Credit agencies learn about tax liens and other debts by researching the public record. After a tax lien has been issued, some time may pass before it appears on your credit report. You shouldn’t assume that simply because your tax lien isn’t on your report now that it won’t appear on the report in the future.

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Credit Reports and Your Tax Lien

Other than protecting your property from government seizure, the best reason to avoid a tax lien is to avoid seriously damaging your credit score. Unlike some types of debt, credit agencies always view tax liens negatively. When a credit agency discovers a tax lien and places it on your credit report, your credit score will decline. As long as the lien stays on your report, your credit score will stay low.

Even after your lien has been released, it may take years to rebuild your credit score.

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State vs. Federal Tax Liens

If you have a tax lien on your credit report and would like to have it removed, then you must understand the difference between federal and state tax liens. A lien issued by your state tax authority will stay on your credit report for the full seven years required by the Fair Credit Reporting Act after it has been released.

Fortunately, federal tax liens are much easier to clear from your credit report thanks to the IRS Fresh Start Program. Instituted in 2011, the Fresh Start Program provides an easy path for taxpayers to remove tax liens from their credit reports.

As long as you have fully paid your tax debt, you can request that the IRS withdraw the tax lien. In some cases, you can have a tax lien withdrawn if you’ve arranged a payment plan with the IRS.

If the IRS agrees to withdraw your tax lien after you’ve paid your tax bill, your next step should be to directly contact the three credit bureaus:

  • Experian
  • Equifax
  • TransUnion

Let each bureau know that your tax lien has been withdrawn and request that the bureau remove the lien from your credit report. Withdrawn liens are generally not included on credit reports. If you can prove your lien was withdrawn, the three bureaus should comply with your request.

Remember that this method of removing a lien from your credit report works only with federal liens. If you’re dealing with a state lien, you can still request that it be withdrawn after paying your debt, but there’s no guarantee your state tax authority will approve the request. If your request is denied, you will need to wait seven years before your lien will disappear from your credit report, assuming your debt has been paid and your lien released.

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Initial Steps for Removing a Tax Lien

If you want to protect your credit score, you need to clear your lien as soon as possible. Fortunately, you can take a few basic steps to get your tax lien off your credit report and limit the harm to your credit score.

First, you need to know the exact amount you must pay to have the lien released. Check your credit report and look for your lien in the public records section. Once you know the amount of the lien listed on your credit report, contact the tax agency that issued the lien to make sure that this amount is accurate.

Now that you know the exact amount of your lien, you need to take steps to pay off your tax debt. If you have the money, you should pay off your debt in full at one time, which will allow your lien to be immediately released.

If full payment isn’t possible, you should request a repayment plan. Once your debt has been paid, ask for written proof of repayment, which you will need when trying to remove the lien from your credit report.

Qualifying for the Fresh Start Program

The Fresh Start Program gives you the ability to request that your lien is withdrawn either before or after it has been paid in full, as long as you meet certain requirements.

For example, if you’ve agreed to a payment plan, meaning you haven’t fully paid your debt, you can qualify for the Fresh Start program if you fulfill the following requirements:

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  • Your debt is $25,000 or less.
  • You are a qualified taxpayer.
  • If you make your payments on time, your debt will be fully paid before the collection statute of limitations or within five years, whichever comes first.
  • You have filed and paid your other taxes on time.
  • You have made three payments in a row toward your debt.
  • You haven’t defaulted on a previous payment plan.

If you’ve fully paid your debt and your loan has been released, you may qualify for the Fresh Start Program if you’ve correctly filed business, individual, and information returns for the previous three years and you don’t have delinquent federal tax deposits or estimated tax payments.

Filing Your Withdrawal Request

Taxpayers who qualify for the Fresh Start Program can request that the IRS withdraw their liens by filing the correct paperwork.

First, you’ll need a Release of Federal Tax Lien form, which the IRS will send you after your debt is paid. Next, find your Notice of Federal Tax Lien, the document notifying you that the lien was issued. Finally, you should mail these two forms to the IRS along with an Application for Withdrawal of Filed Form 668(Y).

When you mail these forms to the IRS, make sure to explain your reasons for the request. If you’ve paid your debt, mention this payment in your explanation. Otherwise, mention the terms of your payment plan.

State that you’re requesting a withdrawal in the hopes of having the lien removed from your credit report. After the IRS has reviewed and approved your request, you’ll receive a Withdrawal of Filed Notice of Federal Tax Lien form. With this document in hand, you can start working on having the lien removed from your credit history.

Getting in Touch With the Three Credit Bureaus

Once the IRS has withdrawn your lien and you have a document proving the withdrawal, you can dispute the lien with the three credit bureaus. Before you file the dispute, you should check all three credit reports to see if the lien is listed on each report. If it is, you’ll need to file an individual dispute with each credit bureau.

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Filing a dispute online is the easiest and fastest way to get a lien taken off your credit report. Each credit bureau provides an online dispute tool that allows you to request a lien removal. While using these tools, you’ll need to provide some information about yourself, as well as proof that the IRS has withdrawn the lien. The benefit of filing online is that you’ll be able to track the progress of your dispute.

You also have the option to file by mail. You’ll need to send a letter to each credit bureau detailing the repayment of your tax debt and the withdrawal of the lien. Make sure to send a certified letter so that you’ll have proof that your dispute was received by all three credit bureaus. After receiving proof that the lien has been withdrawn, the lien should be removed from your credit report.

Finally, you can dispute the tax lien by calling each credit bureau. If you prefer to handle your dispute by phone, be sure that you have all documents related to your lien gathered before you make the phone call. Having the necessary documentation in front of you will make the call much easier.

Preventing a Tax Lien

Removing a tax lien from your credit report is a difficult, time-consuming process that has no guarantee of success.

If you want to avoid having to deal with this situation, your best solution is paying off your tax debt before the IRS issues a lien. Fortunately, you can clear your back taxes and prevent a lien in several ways.

The best solution to pay off your tax debt is to arrange an installment plan with the IRS. This arrangement can allow you to pay off your taxes easily since you won’t have to cover the entire debt at one time. In some cases, the IRS may also agree to a partial payment installment plan, which means you’ll pay a lesser amount than what you actually owe.

An offer in compromise is another option that can help you clear your debt before a tax lien is issued. With an offer in compromise, the IRS agrees to settle your debt, reducing the amount you’ll need to pay. Generally, you’ll pay the settled amount using a short-term payment plan or through a lump sum, if you can afford to do so.

You can also defer your tax debt for a year by filing for Currently Not Collectible status. If you qualify for this program, the IRS will agree to wait one year before attempting to collect your back taxes. This grace period is designed to give you time to get your finances in order so that you can pay your debt and avoid a lien.

Having a tax lien on your credit report can be devastating to your financial future, especially if you’re unable to pay your taxes and have the lien released. If you’re facing tax debt, Solvable is here to help you. We offer reviews of debt relief companies that can help you find the right source of assistance for you. With the right company on your side, you can take steps to work toward resolving your tax debt.

 

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Jill Bridges
Expert Contributor
Last Updated: