If you underpay your taxes, it is crucial that you make immediate arrangements to pay the deficiency. Failing to do so could leave you facing a tax lien. Tax liens are blanket liens that give the government a legal claim against all property you own, such as vehicles and real estate. Both federal and state governments have the ability to file a lien against you for unpaid taxes. Once filed, the lien appears on your credit report – damaging your creditworthiness The amount of time the lien remains a part of your credit history varies depending on when you pay your tax debt.
Paid Tax Liens
If you pay your tax lien in full, the credit bureaus will update the lien's status on your credit report to reflect this fact. Unfortunately, paying your tax lien doesn't immediately repair the credit damage that the lien caused. Nor does paying the debt result in the credit bureaus deleting the lien from your credit reports. According to the Fair Credit Reporting Act, paid tax liens adhere to the general reporting period of seven years for negative credit entries. The seven-year reporting period begins on the day you pay off the lien.
Unpaid Tax Liens
Unpaid tax liens are not subject to the standard seven-year reporting period and can haunt your credit report for more than a decade. The Fair Credit Reporting Act has no official reporting requirements for unpaid tax liens, and the length of time they remain on your credit report differs for each credit bureau. Transunion and Equifax, for example, note that an unpaid tax lien will remain on your credit file indefinitely. Experian, however, limits unpaid tax liens to a reporting period of no more than 15 years.
The credit bureaus and information providers alike occasionally make errors when updating consumer credit reports. Fortunately, if a tax lien that does not belong to you appears on your credit report, federal law grants you the ability to dispute the error and request that the credit bureaus remove it from your credit record. To do so, you must contact the credit bureaus in writing or by phone and file a credit dispute. You can also file credit disputes online. Each credit bureau will investigate the claim and, if it determines the tax lien appears on your report in error, each bureau will remove the error and update your report. You also have the right to dispute paid tax liens that appear as unpaid liens and any information that remains on your credit record beyond the reporting period.
A tax lien always has a negative effect on your credit scores. Because the impact the tax lien has will vary depending on the information currently present on your report, there is no way to estimate exactly how much your credit scores will suffer once a tax lien appears on your credit record. Tax liens remain a negative entry regardless of whether you have paid them off. As a paid tax lien ages, however, it has less and less negative effect on your scores. The effect ends permanently once the reporting period expires and the credit bureaus remove the tax lien from your credit history.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.