You can remove tax liens from your credit reports by paying off tax debt, submitting an IRS withdrawal form and waiting for the IRS to respond. Read on to learn how to remove a tax lien from your credit history.
A government lien against your personal property for failure to pay a tax debt is a serious matter — one that could have major consequences if you don’t deal with it promptly.
Fortunately, there are actions you can take to fix the problem. You can remove federal income tax liens from your credit reports by paying off your tax debt, submitting a withdrawal form to the Internal Revenue Service and waiting for the IRS to respond.
An unpaid tax lien can stay on your credit reports forever. If it’s paid, a tax lien can be released, then removed from your credit reports after seven years. If a lien is paid and then withdrawn by the IRS, it can be removed from your credit reports entirely.
The prospects for tax lien removal continue to change. In 2015, the three major credit bureaus (also known as credit reporting agencies) — Equifax, Experian and TransUnion — introduced the National Consumer Assistance Plan (NCAP). This plan was created to make it easier for consumers to correct errors on free credit reports.
As part of the NCAP, the credit bureaus decided to stop reporting and remove tax liens from credit reports beginning in April 2018. This is good news; however, it’s important to remember that the policy could be reversed at any time.
Tax liens are still filed among public records per state law, even if they’re not shown on personal credit reports. It can still be difficult to take out loans, buy property, sell property, etc., if you have a tax lien levied against you.
A federal tax lien is a legal claim by the government against your property, including real estate and financial assets, when you neglect or fail to pay a tax debt. This could apply to you if you have an unpaid tax bill or owe back taxes.
In simple terms, when you — as an individual or business — fail to pay your taxes, the IRS (or state government) assesses your tax liability, then sends out a bill or demand for payment. If you don’t pay that bill, the IRS will send out at least one more notice, during which time interest on your debt will continue to accrue.
After this, the IRS collection process will begin. If those taxes are not paid, the government will place a notice of federal tax lien on your personal property and assets to ensure that you eventually pay the taxes.
Once you’ve received a notice of federal tax lien, you have until the specified date to pay the full amount of the taxes you owe or else set up a plan to make payment in installments. A tax lien can be removed once the payment plan is in place.
If you fail to pay the tax you owe or set up a payment plan by the final notice’s due date, the IRS can file a notice of intent to levy or lay claim to your property and assets. This doesn’t mean your property will be sold, but it does allow the IRS to file a public Notice of Federal Tax Lien that lets any other creditor or lender know it has the right to seize your property.
In other words, the government must be paid before any other creditors can stake a claim to your personal property.
An IRS tax lien applies to all your personal property. This may include real estate, vehicles, bank accounts, retirement accounts and even Social Security payments.
When you receive a notice of a tax lien from the IRS, you can take three specific steps toward getting it removed from your credit reports:
Once the IRS has filed a notice of federal tax lien, it is in your best interest to let the agency know that you intend to pay off the tax debt, either in full or by setting up a payment plan, such as through Fresh Start.
The Fresh Start program was created to give taxpayers a means to work toward getting their tax liens withdrawn. It increased to $10,000 the amount taxpayers can owe before the IRS files a Notice of Federal Tax Lien. (If you owe more than $10,000, it may be worthwhile to hire a tax attorney.)
It also created an installment option for taxpayers who owe up to $50,000. It’s a direct debit installment agreement under which monthly payments are taken directly from your checking account or other bank account to pay off your tax debt. These payments can be spread over a period of up to 72 months (six years). The IRS offers an online tool you can use to help determine whether you qualify.
Fresh Start also expanded and streamlined the capability for taxpayers to settle their debts through an “offer in compromise.” In such an arrangement, the IRS may accept an amount that’s less than the total amount the taxpayer owes, if the lesser amount represents the most the IRS can expect to collect in a reasonable period of time.
An offer in compromise will only be accepted if the IRS looks at a taxpayer’s assets and income and concludes that the taxpayer can’t pay their total debt via a lump sum or installment payments. To help determine whether you may qualify, the IRS offers a short questionnaire.
The IRS will release your tax lien (a lien release) within 30 days after your debt is paid in full. Or you can file to have your tax lien notice withdrawn from your credit report once you’ve set up a payment plan, like the Fresh Start Initiative.
Once you’ve set up a plan with the IRS to pay off the taxes you owe, you can then apply for withdrawal of your federal tax lien notice by filling out the appropriate form with your personal information. You’ll need to fill out IRS form 12277 and return it to the IRS via certified mail.
Even if you’re still in the process of paying back the taxes (such as through a payment plan), the withdrawal process will help you remove the tax lien notice from your credit reports. You will, however, still be liable for the amount that’s due.
After making an agreement with the IRS that you will pay off your income tax debt through a payment plan (like Fresh Start) and submitting the form to the IRS, your tax lien will be withdrawn from your files after 30 days.
Taking this step is important because having a tax lien on your credit report can impact your credit history and hurt your credit score, which can result in higher interest rates and hurt your ability to qualify for favorable loan terms, get credit cards or purchase property.
Also, it’s important to distinguish between an application for withdrawal and a certificate of subordination. Subordination doesn’t remove a lien but instead allows other creditors’ claims to move ahead of the IRS. This may make it easier to get a loan or mortgage.
After you file a withdrawal request, the IRS will get in touch with the courthouse where the lien originally was filed, to begin the process of withdrawing it. This process generally takes 30 to 45 days.
When your tax lien withdrawal has been accepted, you’ll receive a 10916(c) form from the IRS. This form lets you know when the tax lien has officially been removed from your credit reports.
It’s wise to work toward removing a tax lien from your credit report. Besides hurting your chances of getting a mortgage or a loan, a lien situation also could escalate.
With a lien on your report, the government could see that you haven’t made an effort to pay back your taxes and file a tax levy claim, meaning the IRS would have the authority to claim your property/assets.
A lien and a levy are two different things: A lien establishes that the federal government has an interest in your property when you haven’t paid a debt, while a levy actually seizes your property as a way to settle the debt.
Tax liens are part of the public record per state laws, so having a tax lien on your credit can impact your ability to buy property, take out loans, get credit cards, etc., as stated earlier. Also, refinancing won’t be an option. If you want to refinance your mortgage, you won’t be able to do so until you’ve paid the taxes you owe.
Plus, even if you file for bankruptcy protection, your tax debt or lien may continue afterward.
There are plenty of reasons to settle your tax debt with the IRS. Fortunately, you can take steps to do so and minimize the impact a lien will have on your credit.
Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to increase economic inclusion by helping people build credit and savings so they can build their dreams.
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