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Do tax liens affect your credit score?

Thanks to some new credit reporting rules that went into effect in 2017 and 2018, the news is good


The good news is that tax liens no longer appear on your credit report. The bad news is you still have to pay them.

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The three major credit bureaus – Equifax, Experian and TransUnion – began revamping reporting rules in July 2017 when they changed the criteria for tax liens and civil judgments appearing on consumer credit reports.

Beginning July 1, 2017, the bureaus required all civil public records to include the consumer’s name, address and Social Security number or birth date before they could add that information to any credit reports.

That decision covered new and existing tax liens and judgments.

And an even bigger change happened in 2018.

See related: The three national credit bureaus: How Equifax, Experian and TransUnion work

Credit bureaus move to cut all tax liens from credit reports

On April 16, 2018, the three bureaus decided to remove tax liens – both federal and state – from credit reports altogether.

“Tax liens no longer appear in credit reports, and therefore, do not influence credit scores,” said Rod Griffin, director of public education at Experian, in a news release.

“That doesn’t mean the tax authorities won’t attempt to collect payment, it just means they are not part of your credit history anymore,” Griffin added.

And that means that if you had any tax liens on your credit reports, you probably saw your score go up once that happened.

How tax liens affect your credit score 

Prior to 2018, if a lien got added to your credit report, its credit score impact was difficult to quantify because 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 had on a consumer’s credit score depended on their consumer’s unique financial history, as well as the credit score model that’s being used, said Chris Hobday, vice president at Equifax.

A tax lien was considered a severe derogatory entry, just like bankruptcies, judgments, collections, charge-offs and repossessions, according to John Ulzheimer, a credit expert who has worked for FICO and Equifax.

He said their influence could be as little as nothing or a drop of more than 100 points.

When a consumer satisfied a tax lien by paying what he owed, Equifax typically updated 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 didn’t immediately remove the lien from your credit report.

A paid lien could have remained on your credit report for up to seven years after it was released, and an unpaid lien for up to 10 years after it was originally filed.

Tax liens used to be treated similarly to other negative public record items in FICO’s formula.

While FICO didn’t 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.

See related: What credit score is needed to buy a house?

How to get a tax lien removed

If you still see a tax lien on your credit report, dispute the lien with the credit bureau. Tax liens, both paid and unpaid, have been removed from credit reports compiled by the three national credit reporting companies, so disputing the tax lien public record should result in its removal from the report. 

You may still want to find out if you are eligible to apply to the IRS for a withdrawal, because a tax lien public record may affect other consumer reports. 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 to be 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. 

See related: Charging taxes to earn rewards? You can, but do the math first

You still have to pay off those liens

Just because tax liens no longer appear on credit reports doesn’t mean you don’t have to pay them – they can still have a negative financial impact.

For example, if you apply for a mortgage and you have a tax lien against you, mortgage lenders are likely to view you as more inclined to go into pre-foreclosure or foreclosure, which might narrow your options – and end up in your paying a higher interest rate on the loan.

And mortgage lenders typically ask potential borrowers if they have any tax liens against them – or they can find out if you do via a lien and judgment report, which financial institutions can order.

Tax debt will never disappear, so do yourself a favor and make paying it off a priority so that it doesn’t impinge on the rest of your financial well-being.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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