Understanding Tax Liens and Their Effect on Credit

A tax lien is basically a government’s legal claim to one or all assets owned by a non-compliant taxpayer. Tax liens are placed in order to force individuals to pay their tax debts. A tax lien may be placed at the federal level due to unpaid state income taxes or at the local level due to unpaid taxes on local income and property. In extreme cases, tax liens may lead to loss of property among other assets especially when defaulters refuse or take too long to clear their tax debts. Unpaid tax liens may also attract levies. With a tax lien, the IRS takes legal right over property owned by the defaulter until the debt is cleared. Even after clearing the tax debt, the negative impact of a tax lien remains and it will take many years to undo the damage.

Effect on Credit

A tax lien will have a negative impact on a person’s credit report. Even for people who have had impressive credit scores all through, a tax lien has a major impact and can take the credit score down by up to 100 points. It does not help that creditors view a tax lien as a red flag of a person’s inability to pay money they owe. This makes it very hard for such a person to access credit from most credit facilities.  For more information on how tax liens impact your credit.

How to Remove a Tax Lien from a Credit Report?

An unpaid tax lien will remain in a person’s credit report indefinitely. To get rid of the tax lien, an individual may need to pay the tax debt in full. Even when the debt is fully paid, the tax lien will remain in that person’s file for seven years from the day the lien was filed.

A person can request for a withdrawal from the IRS. If this is successful the tax lien will be deleted from the credit report. The catch here is that the person will have to pay the tax debt in full. Partial payments are, however, allowed and the fact that the person involved can still access credit with relative ease is a plus. Once the tax lien has been removed, the person involved may have to follow up with the credit reporting agencies to do the same.

For taxpayers who can prove that they should not be subject to tax liens in the first place, they can dispute the tax liens and get clearance from relevant authorities. Credit experts may come in handy in such situations. This is because knowledge of the steps involved to remove a tax lien from a credit report is important and can make all the difference in the long run.

Tax liens should be avoided and all taxpayers should do all it takes to pay their taxes in good time. When faced by a tax lien, you have to take the right course of action and address the issue immediately. Quick action can save your property, prevent accumulation of other levies over and above the credit debt, and in some instances safeguard your credit score at the end of the day.

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