Do Federal Tax Liens Affect Credit Scores?

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When you owe back taxes, the IRS issues a tax lien against your assets to force you to pay off the tax debt. Tax liens are considered public records and when one shows up on your credit report, it can significantly affect your credit scores. A tax lien on your record could easily drop your credit score by more than 100 points. It's best to deal with your taxes before a tax lien can be issued.

Tax Liens

You owe taxes on your income at the federal level. When you underpay your taxes, the IRS issues a bill, which accumulates interest each month it goes unpaid. If you fail to pay the debt, the IRS can file a tax lien against your assets, including your house, vehicle and business. A federal tax lien prevents you from selling or borrowing against the property until you pay your back taxes.

Affect on Credit Scores

The IRS does not directly report a tax lien to the credit reporting agencies: Equifax, Experian and TransUnion. Instead, a tax lien is part of the public record information that credit reporting agencies routinely pull and add to credit reports. Once a tax lien is noted on your credit report, your credit score takes an immediate nosedive, falling 100 points or more. As time passes, negative information affects your credit score less, although it still lowers your credit score. And tax liens can stay on your credit report for a long time --a paid tax lien stays for seven years from the date of entry. Unpaid tax liens can stay up to 15 years.

Petition for Removal

Because the IRS doesn't directly report the tax lien, the IRS cannot remove it from your credit report. Instead, you can petition the IRS to withdrawal the tax lien after you pay it; use federal Form 12277 to request the withdrawal. The credit reporting agencies do not list withdrawn tax liens on credit reports, so once the lien is withdrawal it is eliminated from your credit report by default.

Consider Your Options

Once the tax lien hits your report, the damage is done. Paying a tax lien does not improve your credit score. Take action to negotiate a payment plan with the IRS before you get to the point of a tax lien. A tax lien on your credit report is a red flag to potential creditors that you owe money to the government. With a lien on your credit report, you're more likely to be denied credit or to be offered higher interest rates on loans or credit cards. If you do have a lien and pay it off, going through the effort to seek a withdrawal from the IRS should improve your credit score, assuming there is no other negative information on your report.