How tax liens affect your credit score
Credit bureaus will scrub some unpaid tax debts, court judgments from reports
Focusing on credit scores and what consumers can do to improve them
Many tax liens will soon be removed from credit reports, but the ones that remain can severely damage your credit score.
If the government has filed a tax lien against you for not paying income, property or other taxes, it can indicate to creditors you’re a potentially risky borrower. Failure to pay your taxes may give the impression to potential lenders (or even future employers) your finances are in distress or you’re prone to forgetting or ignoring payment obligations.
But if you get hit with a tax lien, there’s a good chance it will never appear on your credit report. The three major credit bureaus – Equifax, Experian and TransUnion – will begin excluding or removing many liens and nearly all civil judgments from consumers’ credit reports starting in July.
Liens and judgments will be left off credit reports if they don’t include the consumer’s name, address and either a Social Security number or date of birth. The decision covers new and existing tax liens and judgments. Eric J. Ellman, interim CEO of the Consumer Data Industry Association, said in an emailed statement about half of all public tax lien data may not meet the new standards.
As bad as a
If a lien does get added to your credit report, its credit score impact is difficult to quantify as it’s just one part of your financial history. Under FICO’s traditional model, your credit score depends on a mix of factors, including credit card and loan payment history, credit utilization, length of credit history and more.
“The impact a tax lien has on a consumer’s credit score depends on the consumer’s unique financial history, as well as the credit score model that’s being used,” said Chris Hobday, vice president at Equifax.
However, “A tax lien is considered a severe derogatory entry, just like bankruptcies, judgments, collections, charge-offs and repossessions,” said John Ulzheimer, a credit expert who has worked for FICO and Equifax. “Their influence can be as little as nothing or as much as over 100 points.”
Credit bureaus get tax lien updates from courts, similarly to how they receive credit information from banks and lenders.
“We receive updates on tax liens on a regular basis, and we match this information to the appropriate consumer’s credit file,” Hobday said.
When a consumer satisfies a tax lien by paying what he owes, Equifax typically updates the credit file within one day of being notified, Hobday said. A lien is released 30 days after payment, according to the IRS. However, settling an unpaid tax debt doesn’t immediately remove the lien from your credit report. A paid lien can remain on your credit report for up to seven years after it’s been released, and an unpaid lien stays for up to 10 years after it was originally filed.
Tax liens are treated similarly to other negative public record items in FICO’s formula. While FICO does not specify the credit score impact of a tax lien, bankruptcies and foreclosures can cause your credit rating to plummet. A bankruptcy can cost someone with a credit score of 780 as many as 240 points, and it can take that person up to 10 years to fully recover. A foreclosure can cause a 140-point drop to someone with a score of 780, and they may not recover for seven years.
Paying your credit cards and loans on time and keeping balances low is the best way to minimize credit score damage if you’re hit with a tax lien. However, there is a way to get a tax lien removed from your credit file, which could blunt any negative impact to your credit score.
The impact a tax lien has on a consumer's credit score depends on the consumer's unique financial history, as well as the credit score model that's being used.
Vice president, Equifax
How to get a tax lien
To get a tax lien removed from your credit report, find out if you’re eligible to apply to the IRS for a withdrawal. A withdrawal removes the public notice of the lien, but you’re still liable for any unpaid tax debt. To apply, you must fill out Form 12277, Application for the Withdrawal of Filed Form 668, Notice of Federal Tax Lien.
You may be eligible if the tax lien has been paid, you’ve kept up with filing all tax returns on time for the past three years, and you’re current on any estimated tax payments and federal tax deposits. You may also qualify if you owe $25,000 or less and you’ve entered into a direct debit installment agreement under which the debt will be paid back within 60 months or before the collection statute expires (whichever is earlier).
Getting the IRS to remove the lien may depend on a few different factors. For example, a withdrawal could be granted if the agency is found to have filed the lien prematurely or not in accordance with its rules, or if the withdrawal will compel you to pay or is otherwise in the best interest of you and the government. Entering into an installment agreement could also help you get a lien withdrawn.
When applying for a withdrawal, be sure to include with Form 12277 the names and addresses of any credit bureaus you want notified.
“Withdrawn tax liens are removed immediately, as long as you let the credit bureaus know the lien has been withdrawn,” Ulzheimer said.
Check your credit report after the withdrawal is granted to ensure it has been removed. If you find any inaccurate tax lien information – for instance, a released or withdrawn lien that isn’t reported as such – file disputes with the credit bureaus.
Credit score is the
least of your worries
A lien withdrawal can help your credit score improve more quickly than simply paying the tax debt, since the latter doesn’t immediately remove it from your credit report. But neither of these moves will improve your credit score much if there are already lots of negative items in your borrowing history.
For now, the best way to prevent a lien from hurting your credit score is obvious: Pay your taxes on time. But if you slip up, your credit score should be the least of your worries. Failure to pay what you owe the government could result in penalty fees and interest charges on late payments, wage garnishment, asset seizure or even jail time.
But one mistake doesn’t necessarily mean you’re branded for life. A pockmarked credit report can heal if you stay true to all your payment obligations, whether they’re taxes, mortgage or car payments or credit card balances.
- Got an 800-plus credit score? Do these 3 things – Ready to start taking advantage of your top-notch credit status? Here are three moves to consider once you join the "excellent" credit score club ...
- Mortgage approved! Time to let your credit score slip? – You've just closed on a new home. Don't rest on your laurels when it comes to your credit score ...
- How to protect your credit score when churning rewards cards – Card churning can hurt your score if you don't have a plan to pay off your balances ...