There can be consequences of receiving a Notice of Federal Tax Lien. One of the main concerns is: how long does a tax lien stay on credit reports?
The IRS utilizes federal tax liens as both a deterrent and a part of their collection process. When a taxpayer has a hefty unpaid tax debt, federal tax liens are part of the agency’s strategy for encouraging payment. The IRS will first assess your total liability and respond to a failure to contact them or begin payment through a public Notice of Federal Tax Lien. This information no longer automatically appears on your credit report, but it can affect you financially.
Unlike levies, liens don’t involve any forfeiture of assets, or an actual claim on an account’s contents. Instead, a federal tax lien represents the government’s interest in your property, above any interest or claims from other creditors. Although a tax lien is not on a credit report, this can negatively impact your ability to get credit, as the government now has first claim on anything and everything you own. Previously, it used to have rather substantial consequences for your credit report as well.
What is a Federal Tax Lien?
When a taxpayer’s debt to the IRS reaches $10,000 or more, the IRS may file a public notice called a Notice of Federal Tax Lien. This lien is a claim placed on all your property and assets, from bank accounts to homes, vehicles, and more. It supersedes any claims made by other creditors, now and for as long as the lien is in effect.
In practical terms, a lien acts as a way for a creditor to secure the payment of debt by claiming the value of a debtor’s property. If ignored, the IRS may turn a lien into a levy, wherein they claim a property, empty an account, or order your employer to withhold a portion of your wages.
Even when liens don’t become levies, they can have dire consequences, particularly if you wish to seek refinancing. You cannot sell property affected by the lien without first paying the IRS, and you’ll have a hard time securing any credit. Because you don’t have anything to secure a loan, it’s difficult to get a bank or lender to cooperate. When it comes to a tax lien and credit reports, liens can no longer be automatically reported on your credit report. However, the lien itself is still public, and may affect your ability to secure a credit for some time.
Liens remain in place until they are lifted by the IRS. The IRS will withdraw a lien under certain circumstances, the simplest of which is to completely pay off your tax debt. Making a genuine effort to pay off your tax debt is often enough to have a lien lifted as well, provided:
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- Your total tax debt is under $25,000 (after counting payments already made)
- You’ve made at least three payments,
- And you have a direct debit installment payment plan with the IRS
A Federal Tax Lien On Credit Reports
Currently, tax liens no longer have a concrete effect on your credit score. This is due to a recent change made in 2017 and 2018, when the three national credit bureaus (Experian, Equifax, and TransUnion) removed tax liens from credit reports, and changed the rules so that federal tax liens wouldn’t be automatically taken into account when calculating a consumer’s credit score.
These changes were made after a study by the Consumer Financial Protection Bureau (CFPB) found that reporting issues too often led civil judgments and tax liens to be linked to the wrong person, and that these reporting issues had detrimental effects on consumers with an otherwise good credit score.
Prior to this change, tax liens would remain on a credit report for up to seven years even if paid, and ten years if unpaid, negatively affecting their score by up to three figures (exact numbers are unknown, and would depend on the individual and how their credit is affected by FICO’s calculations).
Why You Should Still Worry About Liens
Even though tax liens are no longer automatically added to your credit report, they remain public information, and will affect your ability to seek credit while under the effects of a federal lien. Furthermore, ignoring a lien can lead to an IRS levy, which has a much more immediate effect on your finances and property.
Your options for combatting a lien are limited, but if you find that the IRS filed a lien incorrectly (either because you find you owe less than they claim you do, or because the notice wasn’t filed as it should have been, or some other dispute), you can consult the National Taxpayer Advocate Service, the IRS’s Independent Office of Appeals, or eventually take the matter to the US tax court.
If you are worried about your federal tax debt and a potential or existing federal tax lien, we strongly encourage you to seek the advice of a professional. Because tax debt continues to accrue interest and penalties, time is of the essence.
Getting Help with a Federal Tax Lien
Whether it’s the threat of levy or problems with securing credit, getting a tax lien removed as quickly as possible is always within your best interest. The IRS itself recommends that taxpayers pursue either discharge or subordination in cases where they wish to seek financing to pay off their debt.
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- Filing for discharge lets you remove the government’s lien from a specific property, which can help you seek financing.
- Subordination, on the other hand, gives the taxpayer the option of naming a creditor to supersede the government’s claim.
There are limitations and considerations for both discharges and subordination, so consult a tax professional for more information regarding your specific circumstances.
Ultimately, entering a payment plan with the IRS or clearing up your debt outright is the most reliable way to completely removing a lien. If your debt has reached an unreasonable amount, and you are worried about your ability to pay it off within the next few years, a tax relief professional can help you explore your options, including a potential Offer in Compromise.
While a federal tax lien is not on a credit report anymore, their effects may indirectly affect your credit score for some time. If a tax lien is being reported on your credit report after 2018 (you can get a free credit report once a year from each of the three major bureaus), note that you do have the option of filing a dispute. Ask your tax relief professional for more information, and review what a sample dispute letter looks like through the FTC.