February 1, 2017

Credit ScoreTax liens are the government’s legal claim against some or all of your assets when you either fail or neglect to pay a tax debt on time. Tax liens may occur at the local, state level, or federal level. Tax liens are often placed for personal income tax, but may include property tax and other governmental taxes. They can be complex in nature, and may vary in details and form depending on your unique situation.

Tax liens often come with numerous potential legal and personal implications—including on your credit score. Your credit score is a reflection of your ability to repay debts, which means that any unpaid debt could potentially affect it. These marks can greatly hurt your ability to both quality for credit and obtain desirable rates. Some lenders may opt not to extend credit to you at all if you have numerous negative marks.

When it comes to credit, tax liens are deemed serious derogatory marks. A derogatory mark is a long-lasting negative record on your credit report, and can remain on your credit report for seven to ten years from the date of payment. One derogatory mark can drop your credit score significantly, and so it would be best to minimize these marks or avoid them entirely.

If a tax lien is valid, one opportunity to have it removed from your credit report is if it meets specific criteria set by the IRS. Apart from paying your debt, you must also be updated with your estimated taxes for the current year and with filing your taxes for the last three years. Another way to have the lien removed from your credit report before the debt is paid is by paying off your debt through a direct debit installment agreement, with a balance lower than $25,000. Note that you may be able to dispute a tax lien if your credit report shows an outdated paid lien, or if you can prove that you should not have been subject to a tax lien to begin with.

How much a tax lien can affect your credit score varies from person to person. Credit reporting bureaus do not disclose the formula used for calculating credit scores, and so there is no way of knowing exactly how much your score will drop due to a lien. Everything in your credit report is weighed individually and is compared to all other items in your credit history.

Deleting a tax lien can dramatically impact your credit score if there is no other negative information found in your credit history. Of course, deleting a tax lien might only have a small impact on your credit score if you have serious delinquencies such as collection accounts, bankruptcy, and late payments.

Tax liens can potentially remain on your credit report longer than any other item. It is therefore imperative that you understand how they come about and how you can best deal with them. Protect your credit score and avoid tax liens by paying your taxes on time.

Categories: Tax Liens