How Long Do Tax Liens Stay On Your Credit Report?

Do you owe the International Revenue Service (IRS) unpaid taxes? Then there’s the likelihood that the debt may end up in your credit report as a tax lien. But, why would the taxman go to such lengths? Well, they want to inform creditors and lenders that you can’t be trusted to pay your debt. So, if they choose to grant you credit, it’s at their own risk. Furthermore, the government wants to notify creditors that it has rights on the taxpayer’s property, so creditors can’t claim it in case of a default by the debtor.

Good News – Not All Tax Liens Are Part of Credit Reports

If you have been keen on tax reforms, you must have heard that changes were made by the Consumer Financial Protection Bureau (CFPB) in 2017 to remove more than half of tax liens from credit reports. The CFPB argues that it’s all for the benefit of consumers. According to them, credit reports should be consumer-friendly and this means removing something as negative as a tax lien.

What’s a Tax Lien?

A tax lien is a legal claim by the state government or the federal government on an asset belonging to a taxpayer for unpaid taxes. It’s filed by the IRs on behalf of the government as a public notice. So, it makes creditors aware of the fact that the government has a legal claim on the taxpayer’s assets.

Generally, a tax lien means that the government can claim money generated by the affected property. But this is also not the only concern. You also have to worry about your creditworthiness. The existence of a tax lien can negatively damage your credit score. Ordinarily, the more recent your lien is, the heavier the impact on your credit.

Though tax liens will no longer be a part of most credit reports, this doesn’t prevent lenders from accessing the information when reviewing your credit application. After all, it is public record and thus can be accessed by anyone. Whether you are applying for a mortgage or a business loan, you stand a better chance if you don’t have an existing tax lien.

How Long Does a Tax Lien Stay on Your Credit Report?

Usually, the duration that a tax lien takes on public records depends on your willingness to pay. Typically, unpaid liens stay on credit reports for at least 10 years, starting from the time that the IRS files it. In some cases, a tax lien may haunt for as long as 15 years.

Once you pay off your tax debt, the lien only stays on your credit record for 7 years. This is quite unfortunate considering that every taxpayer expects a lien to be removed from their credit report immediately after it’s paid.

But according to the dictates of the Fair Credit Reporting Act, a negative credit filing like a tax lien has a 7-year clearance timeline. Consequently, there’s the chance that your creditworthiness may be damaged even after paying your tax lien off unless it’s removed as shown below.

How Can You Get a Tax Lien Off?

The quickest way out of a tax lien is paying your outstanding tax debt promptly. If you can’t, then you should hire Tax Crisis Institute to explore these options on your behalf:

  • Installment Agreement – In case you feel like you can pay your tax debt in installment, then you need to agree with the taxman. You need to promise them that you’ll be making timely payments every month to reduce your tax bill. So, a fixed amount has to be decided beforehand between you and the IRS.
  • Offer in Compromise – An Offer in Compromise (OIC) is a legal way to clear unpaid taxes for less. You need to convince the IRS that what you are offering is reasonable and it reflects your current financial situation. An OIC is a great option for taxpayers with financial struggles.
  • Payment Extension – If all you need is a bit of time to pay off your tax debt, you should consider requesting a payment extension. The IRS may allow you up to 120 days.
  • Lien Withdrawal – If you have been filing your tax returns punctually and accurately in the last three years, you can file for a tax lien withdrawal. To do it, you’ll need to fill out Form 12277 that’s available on the IRS website. The other way to qualify for a tax lien withdrawal is if your tax lien is less than $25,000. However, a tax lien withdrawal doesn’t mean that your tax debt is forgiven. You’ll have to pay your debt in full.
  • Delay Collection – If you have reasons to believe that your financial situation will improve in the coming days, you can apply for Currently Not Collectible (CNC). It temporarily delays collection by the taxman and puts a pause on your tax lien. You, however, need to prove that you are struggling financially like in the case of an OIC. You are also expected to have filed your recent taxes duly.
  • Property Discharge – If the lien has been placed on every asset that you own, you can have it removed on specific properties. This is what we call a Discharge of Property. It doesn’t make the lien go away completely but it at least removes it from a part of your property. The discharged property can be sold and the earnings can be used to pay off the tax debt and to remove the lien from other properties.

Why Still Consider Paying a Tax Lien Off?

Just because tax liens will no longer impact your credit record doesn’t mean you are off the hook. You need to clear it for two major reasons. One, it’s one way to boost your credit score. Of course, you may not see the change if your credit score is good. Two, lenders can still go back to check if you have a tax lien filed against you before they can grant you a loan. Nothing stops them from doing so since a tax lien is a public notice accessible by everyone.

Closing Thought:

A tax lien can negatively impact your credit record – there’s no doubt about that. Luckily, the initiative by the CFPB to remove liens from credit records means that it can no longer be used as a ground to deny you credit. But still, this is not an excuse not to pay your tax debt. The government will still collect, sooner or later. If you are facing a tax lien, contact Tax Crisis Institute today. Our team of experts can help negotiate a settlement, and help you through your tax crisis.

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