A tax lien used to be one of the most damaging items you could have on your credit report. That changed in 2018 when all tax liens were removed from credit reports. A report by the Consumer Financial Protection Bureau noted that reporting liens was difficult and accuracy not guaranteed. Therefore, the reporting agencies decided to remove tax liens from reports.
How Does a Tax Lien or Levy Affect My Credit?
Tax liens and tax levies no longer appear on your credit report and do not directly affect your credit. These tax issues were removed from credit reports after the Consumer Financial Protection Bureau determined that many liens and levies were reported inaccurately. If you have had a tax lien in the past, check your credit report to make sure it has been removed.
Tax liens and levies can affect your credit indirectly even if they don’t appear on your credit report. A tax levy on your assets or income takes priority over all other obligations. Money that you need for a mortgage or loan payment is not exempt. If a tax levy seizes your wages or the money in your bank account, you may be unable to make payments on loans. That can affect your credit.
It’s important that you ensure that these records are off of your report. A tax lien can prevent you from selling assets or financing loans, cutting you off from important sources of cash. If you miss loan payments as a result, your credit may be affected. A tax levy or lien is not discharged by bankruptcy in most cases.
A tax lien may affect your ability to get a mortgage. A mortgage lender may carry out a public records search as part of their assessment of a loan applicant. If they find a tax lien they will include it in their assessment of your ability to pay.
A tax lien is very difficult to remove by any means other than paying it. Even if it doesn’t appear on your credit report, it affects your ability to meet those other obligations and that can affect your credit.
The removal of tax liens from credit reports was caused by a change in policy, not a law. It could be reversed at any time. If that policy change is reversed, tax liens will affect your credit.
What Is a Tax Lien?
A tax lien is a legal claim against your property that the government files if you don’t pay your tax bill. If you owe more than $10,000 the IRS will automatically file a lien and it may also file for less. Once a tax lien is in place the IRS can claim anything you earn from the sale of your assets.
The IRS files the tax lien with the local authorities in your area. Local and state governments can also file tax liens if you fail to pay taxes. A tax lien applies to all property you own and can be attached to assets you acquire after the lien is filed. A tax lien may make it difficult or impossible to sell your property or refinance loans that you used to pay for your assets.
What Is a Tax Levy?
If a tax lien is placed on your property and you still don’t pay, the IRS may proceed to a tax levy. A tax levy is the actual seizure of your property to meet your tax obligation. The government can use a tax levy to garnish your wages, seize money in your bank or investment accounts, or confiscate your property.
A tax levy and a tax lien are different things. A tax lien establishes that the IRS has a claim on your assets. A tax levy actually seizes assets. A tax lien does not seize your assets, but if a lien is in place, a levy may follow it if you do not settle your tax obligations.
How Do I Know If I Have a Tax Lien?
The IRS will not issue a tax lien or levy without warning. If you fail to pay your taxes on time, the IRS will mail you Letter 3172, a Notice of Federal Tax Lien Filing. If you believe the filing is an error, you will have 30 days to appeal. Instructions for an appeal will be included in the letter.
If you have moved recently or the notices are lost in the mail you may not receive them. Some taxpayers don’t discover that a lien is in place until they try to sell or refinance their homes.
If you have not paid taxes there is a high probability that a lien is in place or soon will be. It’s important to address this situation immediately. If you know you have not paid taxes, check with the IRS Centralized Lien Unit (1-800-913-6050) to see if a lien is in place. If you have failed to pay other taxes you could have State or local tax liens in place as well.
What Can I Do If I have a Tax Lien?
If you have a tax lien or you believe you may have one soon, don’t avoid the situation. Taking the initiative and contacting the IRS will show good faith and make it easier to negotiate. Always respond immediately to any communication you receive from the IRS.
The most effective way to remove a tax lien is to pay your tax bill. If you pay in full the lien will be lifted within 30 days.
If you don’t have the capacity to pay you may be able to negotiate an installment agreement or apply for an Offer In Compromise. You may be able to get the IRS to classify your account as currently not collectible. There may be penalties associated with these options, but they may be preferable to facing a tax lien or levy.
If you are paying installments, you may qualify to have your lien lifted through the IRS Fresh Start Program even before you have paid the entire debt.
You may be able to have the tax lien discharged from certain properties, especially if the sale of those properties would enable you to pay your taxes.
A tax lien may no longer appear on your credit report, but it can have a huge impact on your finances, and that will affect your credit. Resolving a tax debt can free up funds to pay other debts and that can help your credit. Take tax liens seriously and take action to avoid them or have them lifted as soon as possible.