Need to Get Rid of Tax Liens? Here’s the RIGHT Way to Do It

Tax liens have serious consequences and not just for your credit. Unpaid tax liens can lead to tax levies – where the government comes in and seizes your property to satisfy your tax debts. This means you could lose your bank accounts, your car, or even your home if the debt is large enough.

Even when you pay them, tax liens still hurt your credit for at least 7 years until they fall off of your credit report. Unless you know how to have tax liens removed from your credit file, taking the responsible route will have little benefit, credit-wise.

Understanding Tax Liens

Tax liens are similar to judgments on your credit report in that they are a legal remedy for your creditors to collect money from you. With a tax lien in place, the IRS establishes that they have a legal right to your property.  This includes:

  • Real estate you own – houses, land, etc.
  • Personal property – your cars, jewelry, etc.
  • Business property – any business property as well as accounts receivable (if you own a business)
  • Financial assets – your bank accounts, retirement accounts, etc.

Having tax liens makes it impossible for you to sell your home or qualify for new credit. The tax liens take precedence, so when you try to sell your home part of the purchase price has to be used to satisfy the lien – a deal that few buyers will agree to.

Creditors see tax liens as a serious red flag in your file and in your ability to repay. Because liens can easily turn into levies and the IRS has already established that it is “first in line” to collect, creditors know that they won’t have much recourse if you default in the future.

Your credit scores will drop significantly, and the better your credit was before the tax liens, the worse it will be afterwards. It is not uncommon to see drops of 80-100 points or more in your credit scores. The damage can be difficult to undo, because unlike consumer credit accounts, unpaid tax liens remain on your credit file indefinitely. (And the longer the debt goes unpaid, the greater your risk of being levied and having your property and assets seized.)

Tax Liens and the IRS

While it’s true that the IRS files the tax lien that ends up on your credit report, IRS doesn’t directly report to any of the credit bureaus. Tax liens appear as a matter of public record in the same way that bankruptcies and judgments do. Because of this, getting the tax liens off of your credit report requires dealing with both the IRS and the credit reporting agencies.

Compounding the problem of tax liens is the fact that you often won’t be informed of the tax lien until after it has already been placed. Generally speaking, the IRS will only send you a notice demanding payment. If you don’t follow up in time, they will file what is called a Notice of Federal Tax Lien. At this point, unless there are errors – in the amount you owe, the way the lien was filed, etc. – you are stuck with the tax lien on your credit report indefinitely as long as it is unpaid.

Even filing for bankruptcy will not discharge tax liens. The only way to avoid tax liens through bankruptcy is to file before the lien is attached, but bankruptcy presents its own set of credit problems and will damage your credit as well.

Removing Tax Liens from Your Credit Report

Tax liens are subject to the same fair credit reporting laws (FCRA) that govern all debts. You can dispute these errors and if the government cannot prove that you owe the debt, the lien will be removed from your credit file.

However, the government is much less likely to ignore a dispute based on erroneous information, especially when the debt is substantial. What most often happens is that the IRS will confirm or update the information and you’ll still be stuck with the tax lien on your credit report. If you pay the debt in full, the IRS will “release” the lien, but the released lien still gets reported for 7 years after you make payment in full.

Fortunately, it is possible to remove a lien from your credit report even when it hasn’t been paid in full.

To do this, you have to request a specific remedy known as a “withdrawal”. This is different from having tax liens “released” after payment has been completed. You can even request a withdrawal while you are still making payments on the lien.

The only catch is that you have to pay the amount in full. The IRS won’t withdraw tax liens for settlement offers, and you must keep up with the payment plan. Despite having to pay the total amount over time, this can be a very attractive option when you need to qualify for new credit or sell your home and must have all tax liens cleared.

Removing tax liens from your credit report requires filing a specific withdrawal request on IRS form 12277. From there, you will still need to follow-up with the credit bureaus as the IRS will not notify them that the lien has been withdrawn.

That means that you will not only have to coordinate with the IRS, but all three credit reporting agencies as well in order to ensure that your tax liens have been removed from your credit report. Withdrawals may also be possible for older liens that have already been paid off, but again you will need to follow the same process of dealing with the IRS and credit bureaus separately.

Because the IRS does not coordinate with the credit bureaus the way typical creditors do, it can prove both frustrating and confusing for the average consumer. Plus, if you aren’t very familiar with tax laws it’s easy to find yourself dealing with a release versus a withdrawal – which leaves you with fewer options to restore your credit.

In these situations, it’s often best to work with an expert that understands tax liens and how best to proceed in your particular case. If you have tax liens on your credit report and aren’t sure how to remove them, we can help. Get in touch with our team of credit repair experts and let us walk you through the process. You won’t have to deal with the back and forth with the credit bureaus, and you’ll have peace of mind knowing that your good credit has been restored.