How Removing A Tax Lien Affects Your Credit

We received two questions about tax liens recently, and it give me the opportunity to check in and see how the IRS’s initiative to give taxpayers a “fresh start” after they’ve paid off tax liens is working.

My credit scores are 730, 723 and 728 but I have a tax lien filed against me. If I can get this removed how many points will this bring up my score? I apply for car loans but keep getting rejected because of my credit report. I recently had to sell my truck because I could not get the truck inspected, thus I have no vehicle. I am currently using my ex-wife’s mom’s car to get to work, but I’ve been given a deadline on this favor from her. Please help me — Mike

Mike, we can’t predict exactly how much your scores will rise if this tax lien is removed. That will depend on how old the lien is, as well as what other types of negative and positive information are listed on your credit reports. As you already know, though, tax liens are considered very negative, so getting it removed would be a good idea. (Don’t ignore other factors that may be hurting your credit scores. Credit.com’s free Credit Report Card can help you understand additional factors that may be impacting your scores and making it difficult for you to get financing for a new vehicle.)

So how do you get a tax lien removed from your credit reports? Until recently, tax liens remained on credit reports for seven years from the date they were paid or satisfied. But under the IRS Fresh Start program announced in early 2011, you can request that the IRS withdraw the lien if you have paid or satisfied the tax debt. This is not something that happens automatically. You must ask.

The last time I wrote about that program it was brand new. Your question gave me the opportunity to find out how this program is actually working. According to the instructions, taxpayers must fill out Form 12277 requesting that the lien be withdrawn. If it is withdrawn, the IRS will file the notice of withdrawal with the office where it was recorded and send you a copy. You can also request, in writing, that the IRS notify credit reporting agencies, creditors or financial institutions. It’s up to you to provide the addresses for those parties you want notified of the withdrawal.

How easy hard is it to get a tax lien removed?

Scott Estill, a former senior trial attorney and author of Tax This! An Insider’s Guide to Standing Up to the IRS warns that “anyone trying this must remain very patient and diligent in their efforts as it will take a bit of time (i.e., more than one phone call!) and there will be some resistance as getting many IRS employees to do more paperwork can be a challenge.”

Karla Dennis, a Licensed Enrolled Agent with Cohesive Tax, told me that her firm has worked with two clients who paid off tax liens in 2011 and requested that those liens be removed from their credit reports. “In both cases, the lien was removed, but it was not easy by any means,” she says. “IRS means well with this approach but the practicality of it is still extremely time-consuming.” One of her firm’s clients was trying to get the lien removed in order to close on a mortgage loan. “We started this process in May and did not get the lien removed until late August. It took over 90 days for this to happen.”

I asked Dennis whether the client’s credit reports were updated automatically or whether they had to dispute their credit reports after the IRS removed the lien. “There is not an outlined protocol,” she responded. “We did both. We disputed it through the credit bureau as any dispute has to be removed until reviewed. But, we also requested it be removed through IRS lien desk notification system. In the end, the credit bureaus removed and IRS verified it was correct to stay off of the reports.”

Next question: Must a withdrawn lien be disclosed on future applications? »

Image: Raquel Baranow, via Flickr.com

Once a tax lien is withdrawn by the IRS, it can be removed from credit reports. Is it still something that has to be disclosed on future applications after withdrawal? If an application asks about prior tax liens, I assume I still have to say “yes,” right?

That’s not a common question on most consumer loan applications. “I don’t recall seeing that question on a credit card application, ” says Credit.com credit card expert Beverly Harzog. You aren’t likely to see that question on a mortgage application either. Mortgage applications require you to disclose if you are presently delinquent or in default on any Federal debt, but don’t ask typically ask about prior tax liens that have been satisfied.

But don’t be so sure that just because a tax lien no longer shows up on your credit report that it has disappeared altogether. Joe Kelly, president of ArcLoan.com says that his firm was recently helping a homeowner refinance when a tax lien made a surprise appearance. “The lien wasn’t on the credit reports, but it showed up in the property records as a lien against the property,” he explains. “The homeowner was required to either show proof it had been satisfied or pay it off before the new loan could be completed. ”

So the answer is, “yes,” you will need to answer truthfully if this question comes up. But it’s not likely that it will.