Table of Contents
- What Is A Tax Lien?
- How Does a Tax Lien Work?
- Federal Vs State Tax Liens: Is There A Difference?
- What Will the IRS Do With a Federal Tax Lien?
- What are the Effects of Having a Tax Lien?
- How Can I Get Rid Of A Tax Lien?
- How Do I Get Help If I Have A Tax Lien?
- How Can I Avoid A Tax Lien?
- How Would I Know If A Tax Lien Is On My Report?
- Does Paying Taxes Late Affect My Credit?
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Your credit report contains a lot of information about your credit and spending habits. They can affect your credit score positively or negatively. One of the things that used to be included in a credit report is the tax lien.
How long does a tax lien stay on a credit report? The good news is that it’s no longer included in your credit report since 2018. Before that, unpaid tax liens remain on a credit report for 10 years, while paid tax liens remain on record for 7 years.
What Is A Tax Lien?
A tax lien is a claim that the Internal Revenue Service (IRS) files in line with the government’s right to collect money from a taxpayer when you failed to pay your taxes. It means that the government can take your properties, such as your home and car, and sell them to cover your outstanding tax bill.
How Does a Tax Lien Work?
When you don’t pay your taxes, the IRS sends you a tax bill. It will send you collection notices as a reminder of your obligation. However, after sending you five notices and you still haven’t made a payment, the next thing you’ll receive is a notice of tax lien from the federal or state government. Its purpose is also to notify creditors that the government has attached a tax lien to your properties, which means that it has the priority legal claim rights to collect.
Federal Vs State Tax Liens: Is There A Difference?
Is there a difference between a federal tax lien and a state tax lien? Yes. You pay taxes to both the federal and state governments, which means that if you have unpaid tax debts, they can go after you. You may receive tax liens from both governments if you owe them taxes.
What Will the IRS Do With a Federal Tax Lien?
The IRS may attach a lien against your properties, such as your home, other real estate, vehicle, and even your bank accounts. This happens when you have delinquent federal tax payments and you have not made any effort to pay that taxes you owed.
Federal tax liens are considered more important than other creditors’ claims. You’ll also struggle to sell your assets or get new credit. The only way out, if the tax liens are accurate, is to fully pay what you owe, reach a settlement agreement with the IRS, or wait for the debt to expire based on the statute of limitations.
A lien will appear on your credit report and cause significant damage to your credit score. You’ll be unable to sell or refinance any asset with an attached lien.
What are the Effects of Having a Tax Lien?
A tax lien will attach to all of your assets and future assets that you may acquire while the lien is still in place. In terms of your credit, you may find it difficult to get credit. If you have a business, the IRS may attach a lien to all, including all rights to, business property. Even if you file for bankruptcy, your tax debt and lien may continue.
How Can I Get Rid Of A Tax Lien?
If you received a tax lien, it’s not the end of the world. You can mitigate its implications to your ability to buy a house, secure a loan, or get a job. Here’s what you need to do:
1. Pay Your Tax Debts
The easiest way to get rid of a tax lien is to pay in full your outstanding tax debt. The IRS will release you from your tax lien within 30 days after they received your payment.
2. Negotiate For A Payment Plan
If you can’t pay your tax debt in full, you may be able to negotiate for an installment agreement to settle your debt. You can apply for a payment plan here. Your tax lien will remain until you’re fully paid to protect the government’s interests.
You may qualify for a long-term (120 days or less) payment option if you owe $50,000 or less in tax dues, along with interests and penalties. A short-term payment plan is also available if you owe less than $100,000. Depending on your payment method, you may also have to pay other costs, such as a setup fee between $10 and $149.
3. Apply For A Certificate Of Discharge
You may also qualify for a discharge of property from a tax lien, which may or may not require you to pay your tax debt. The approval is determined based on different Internal Revenue Code (IRC) provisions, such as the following:
- 6325(b)(1) – if your property’s value is at least twice the amount of your tax liability
- 6325(b)(2)(A) – if you make a partial payment of at least equal to value of the government’s interests in the property
- 6325(b)(2)(B) – if the government has determined that it’s interest in your property has no value, that is when the debt is higher than the fair market value of your asset
- 6325(b)(3) – the IRS has agreed to the sale of the property, with the government still having the priority claims to the fund
- 6325(b)(4) – you’ve made a deposit or provided an acceptable bond that’s equal to the government’s interest in the property
4. Apply For Withdrawal Of Lien
Under the Commissioner’s 2011 Fresh Start initiative, which aims to help struggling taxpayers, you may be eligible for a tax lien withdrawal. It means that the government will remove the public notice of your tax lien and it will no longer compete with other creditors’ claims to your property. However, you still owe and must pay the tax debt.
General qualifications include the following:
- You’ve filed diligently all your tax returns over the past three years
- Your tax payments and federal tax deposits (composed of federal income, unemployment, Social Security, and Medicare taxes) are updated and current
5. Wait It Out
A tax lien won’t appear on your record forever. If you can’t pay and you don’t have any valuable property, you may choose to wait it out. The federal government has a statute of limitations on tax liens. The IRS has 3 years from the date that you’re required to file a tax return to make additional assessments of potential tax liabilities. The government can try to collect money from you for 10 years.
Each state also has different rules. Here’s a quick overview of the tax lien statute of limitations by state. Other states not on the list follow the government’s general three-year rule.
How Do I Get Help If I Have A Tax Lien?
1. RS Hotline. To understand your tax lien, you can reach out to the IRS through the following numbers:
2. Collection Advisory Group. You may also contact your local advisory office.
3. Free tax relief services. You can seek help from organizations that offer free debt counseling and tax relief services, such as Total Tax Solutions. The IRS also offers free tax preparation help to qualified taxpayers.
How Can I Avoid A Tax Lien?
Once you get rid of your tax lien, do your best to avoid getting one again. Pay all your tax obligations on time. If you missed payments and you receive collection notices from the government, don’t ignore them.
A tax lien is just the first step for the government to exercise its right. You wouldn’t want it to escalate to a tax levy. It’s when a tax levy is attached to your property and the government may legally force you to sell your properties to pay your back taxes. With a lien, they won’t force you to sell anything, but they reserve the right to collect money once you sell them.
How Would I Know If A Tax Lien Is On My Report?
If you received a Notice of Federal Tax Lien from the IRS before 2018, you may have seen it on your credit report. How long does a tax lien stay on a credit report? Tax liens used to stay on credit reports for 7 years if you’ve paid it and 10 years if you didn’t.
After 2018, the credit bureaus no longer include tax liens on credit reports. One reason is that tax liens reporting had several inaccuracies, such as people sharing the same first and last names.
How to remove a tax lien from a credit report if you still see one? You must file a dispute with the credit bureaus: Experian, Equifax, and TransUnion. You can send your dispute online or by registered mail. They can address the issue within 30 days and update your record.
You can get one free annual copy of your credit report from the three national credit bureaus: Experian, Equifax, and TransUnion. (Note: Due to COVID-19, you can get free weekly credit reports from these three bureaus until April 20, 2021, via AnnualCreditReport.com.)
Does Paying Taxes Late Affect My Credit?
Yes, it does. Late tax payments and tax liens no longer appear on credit reports since 2018, which means they’re not factored in your credit score. However, your debt may still affect your credit in some other ways.
For instance, tax liens are public records. That means creditors and lenders can still see them if they conduct public record searches as part of their loan or credit approval processes. In some cases, a tax lien could be a reason that your application is denied.
So, how does a tax lien affect buying a house? As you see, a tax lien has negative implications on your ability to buy a house through a mortgage loan. Even if you manage to get approved for a mortgage, you’re likely to pay a higher interest rate than those who don’t have unpaid back taxes. Because the government has first rights on your assets, you’re considered a higher risk to the lender in case of defaulted payments.
A tax lien used to appear on a credit report, but due to some issues in tax lien reporting, the credit bureaus have decided to remove them. That means they no longer affect your credit score. If you still see a tax lien on your report, have it removed by following the steps we mentioned above.
However, a tax lien not appearing on your credit report doesn’t mean that you can neglect it now. It’s a public record that creditors, lenders, and employers can access when they do background checks, so it can still affect your credit indirectly.
It’s best to pay your tax debts as soon as possible to prevent negative implications on your credit, homeownership, and employment. Avoid a tax lien by ensuring that you pay your tax obligations on time. Don’t hesitate to seek professional help so that you understand better your responsibilities and your rights.