You may be wondering how to remove a tax lien from your credit report, but thanks to recent developments, you probably won’t have to. Read more about this update here.
Steps on How to Remove Tax Lien from Your Credit Report
Step 1: Understand the Effects of a Tax Lien on Your Credit Report and Your Finances
Let us start with the great news: As of April 16, 2018, a tax lien no longer has an impact on any credit score.
However, don’t start celebrating just yet. A tax lien remains a public record, which creditors can still find and use to influence the borrowing processes.
A taxpayer should not only address this matter with the IRS, but also with the state. Each state has its own tax processes and levies, so a taxpayer should seek advice from a local tax advocate specialist when trying to remedy a tax lien.
But where does a tax lien attach in the first place? Basically, the IRS attaches a claim on any asset as a guarantee the government will still receive taxes due, even if the taxpayer did not pay their tax debt, through the liquidation of that asset with a tax lien.
Most of the time, the IRS attaches a tax lien to a real estate property. For some businesses, the IRS can also attach a lien to machinery and other valuable assets.
Technically speaking, any tax lien that a taxpayer currently has should not affect their credit score anymore. Credit agencies no longer include tax liens in a credit report.
However, creditors and lenders can still take into account the fact that the taxpayer has a tax lien. Since a tax lien functions like a mortgage, a lender may decide to either 1) increase the interest rate due to higher perceived risk or 2) reject the loan application entirely due to having no asset as a loan guarantee.
Also, some credit reporting agencies may still mistakenly leave a tax lien in a credit report.
For those who have older credit reports, specifically before 2018, knowing about how to remove tax lien from credit reports is still helpful. To properly take out the tax lien from your credit history, the IRS has to let go of the lien first, and then the taxpayer should wait for the credit score to receive an update to the correct listing.
Lastly, a tax lien can lead to more burdensome tax collection methods from the IRS, like a tax levy. It is in the best interest of the taxpayer to remove a tax lien as soon as possible, not just in the name of establishing good credit, but also due to the consequences and negative implications brought by a lien.
Step 2: Follow the IRS Lien Withdrawal or Release Process
Before we proceed on how to remove a tax lien from a credit report, we should have a short refresher on how a taxpayer can merit a tax lien in the first place.
Generally speaking, a taxpayer receives around five letters and notices before receiving the Notice of Federal Tax Lien (NFTL). These letters include the first reminder of unfiled taxes, around three to four letters reminding of the unpaid debt, and finally, the tax lien letter.
Upon the start of the tax lien, the taxpayer has two options. He or she can either ask the IRS to 1), withdraw the tax lien; or 2), release the lien on the asset.
Withdrawal of the tax lien makes it seem like there was no tax lien to begin with. The release of the tax lien means that the tax lien did exist and that the taxpayer paid all obligations or entered into an agreement with the IRS.
For a tax lien withdrawal, the taxpayer has to file IRS Form 12277.
On the other hand, a tax lien release technically applies after the settlement of the tax debt. Typically, the tax lien release is formalized, meaning erasure of the lien on record, within 30 days of complete payment.
IMPORTANT: If the taxpayer has successfully negotiated an Offer In Compromise, then the tax lien release happens when the taxpayer has finished paying the new offer.
Step 3: Understand Who Qualifies for a Tax Lien Withdrawal and Release
A taxpayer can request for an IRS tax lien withdrawal only:
- If the taxpayer cannot realistically pay the tax debt in full, or there is a new payment plan, option, offer, or agreement with the IRS;
- The taxpayer has satisfied the tax debt;
- When the withdrawal of the tax lien can help make the collection of taxes quicker. For example, the taxpayer proved good faith as well as a systematic plan that can pay off the tax debt, like getting a loan from the bank while mortgaging an asset;
- Incorrect process or procedure happened due to no fault of the taxpayer. Specifically, the IRS sent incorrect forms or information to the taxpayer;
- Withdrawal of the NFTL will work out a win-win situation, with the consent of the taxpayer and all parties in the process.
On the other hand, a tax lien release requires that a taxpayer:
- Already paid all tax debts. The taxpayer does not need to send any additional forms as the IRS informs the court within 30 days to cancel the lien.
- Successfully applied for a currently not collectible status. However, this only postpones the application and the IRS can still apply the tax lien again if the taxpayer loses eligibility of the not collectible status.
- Has an installment plan in place.
The installment plan provision requires more discussion.
Getting an installment plan is a lot easier compared to getting an Offer In Compromise or the CNC status.
However, there are also other interesting plans not everyone might be aware of. For example, there is a Direct Debit Installment Plan agreement for taxpayers who:
- Have less than $25,000 in debt. For those with more than $25,000, the IRS can accept a downpayment so that the taxpayer can reach $25,000.
- Then, the taxpayer agrees to a period of 5 years, basically 60 monthly payments, to pay off the tax debt.
- Lastly, the payments have started and the agreement is finalized.
Once the Direct Debit Installment Plan is in place, the IRS informs the court or registry to have the lien removed within 30 days. Taxpayers who want to know more options and clarifications on how to remove tax lien from credit report can contact the IRS.
Some taxpayers may think that knowing how to remove a tax lien from a credit report is enough to save their financial difficulties. However, while a tax lien may no longer affect the credit score directly, it still continues to burden delinquent taxpayers through indirect means. Resolving a tax lien should always be a priority, whether it appears on your credit score or not.
Do you have any questions about tax liens and their impact on the credit score? Any other issues or concerns about federal taxes? Let us discuss in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.