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From the Experts at Credit.com

How Do Unpaid Taxes Affect Your Credit?

by Lucy Lazarony

How Do Unpaid Taxes Affect Your Credit Report

Not paying your taxes can seriously hurt your credit reports. But there is a way to fix that if you qualify.

Will Unpaid Taxes Affect My Credit Report?

You can check your credit each month using Credit.com’s free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. Checking your own credit reports and scores does not affect your credit score in any way.

While the fact that you owe the IRS money isn’t automatically reported to credit reporting agencies, if you owe $10,000 or more the IRS will automatically file a Notice of Federal Tax Lien, which will appear on your credit reports as a seriously negative item. (It is in the same category as a repossession or court judgments.) State and/or local taxing authorities may also file tax liens.

Once the IRS files a Notice of a Federal Tax Lien against you, it may limit your ability to get credit. And even if you file for bankruptcy, your tax debt and lien may continue. (Though some tax debts can be discharged – essentially “erased” – in bankruptcy.)

How Do I Get A Tax Lien Removed From My Credit Report?

According to the IRS, the best way to get rid of a federal tax lien is to pay your debt in full. Once you do, the IRS will release your lien within 30 days after you make a full payment.

Having a tax lien on your credit report is a serious negative item and it could remain on your credit report for seven years after the tax bill is paid, unless you take steps to have it withdrawn.

Negative accounts like tax liens can drag down your credit scores. If you want to see where your credit currently stands, and whether you have negative items on your credit report, you can use the Credit Report Card, a free tool that updates your scores monthly.

Fortunately taxpayers may be able to get lien withdrawals after resolving their tax liabilities. And, in most cases, the IRS will withdraw a tax lien when a taxpayer enters into a Direct Debit Installment Agreement.

Once you pay off a tax lien or enter into an installment agreement, contact the IRS and request that the tax lien be withdrawn from your credit report. You do this by filing IRS Form 12277.

How Can I Avoid Tax Liens?

To avoid a tax lien, pay your taxes as agreed and if you cannot pay the full amount consider other payment options such as paying by installment agreement. Paying a tax bill by installment agreement will not affect your credit because installment agreements are not reported to the credit reporting bureaus.

Charging a big tax bill on a credit card is another option, if you have a large enough credit line. But doing so could hurt your credit in a couple of different ways. First off, charging up to a card’s limit will hurt your credit utilization ratio, which accounts for 30% of a credit score. And second, if you should struggle with your card payments and fall behind by 30 days or more, your credit score will drop even further as late payments are reported.

Updated on January 22, 2015


  • Doug Goodfellow

    I had a tax lien which was satisfied, but, as the article indicates, it looked to be on my credit report for seven years beyond that date of satisfaction. Blecccch. As it turns out, though, the IRS is actually pretty good about helping you get those off your record. If you’ve satisfied the lien (perhaps also if you have a payment agreement to which you’ve adhered, but I can’t speak to that), and have several years of taxes filed subsequent to the problem year(s) which led to the lien, and have filed your taxes on a timely basis, you can print IRS Form 12277 (http://www.irs.gov/pub/irs-pdf/f12277.pdf), complete and submit it as per the directions, and a few weeks later you’ll most likely receive a notice of withdrawal of filed lien, which essentially says to the county clerk’s office (which is where the lien was filed) that the lien never existed. Once you get that form, scan it and send it to the three reporting agencies as evidence for a dispute in which you ask for the lien to be removed from your record. They did it for me; they’ll do it for you. One final note: Just to be safe, if you are or were married when the lien was filed, dispute the lien six times: three for you, and three for your spouse. I was pleasantly surprised how easy this process was. Hopefully, if you need to take advantage of it, you will be, too.


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