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How Do Unpaid Taxes Affect Your Credit?

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How Do Unpaid Taxes Affect Your Credit Report

Not paying your taxes can seriously blemish your credit reports. That’s according to Rod Griffin, director of public education for Experian, one of the three major credit bureaus in the U.S. “Unpaid taxes can result in a tax lien,” he wrote in an email, “which will be reported on your credit report [and remain on it for up to 10 years.] Once paid, a tax lien will remain for seven years from the filing date of the lien.” Worse still, Griffin added, “your credit scores may drop significantly if a tax lien is reported, and your credit scores may be impacted while the tax lien appears.”

This is bad news for consumers who are looking for credit, be it via a credit card, mortgage, auto loan or something else. If you’ve had trouble making payments to the IRS and are concerned about the effects troubles with the IRS may have on your credit report, here’s a guide to what you need to know.

Check Your Credit

It’s important to check your credit so you know where you stand and if any tax liens have appeared on your record. You can pull your credit reports from the major credit reporting agencies for free once a year at AnnualCreditReport.com. You can also view a free snapshot of your credit report, updated every 14 days, by signing up for an account on Credit.com. 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.

Know When the IRS Files a Tax Lien

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, as lenders view this as a sign you can’t manage your finances. 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, as Griffin explained, 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.

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, be sure to contact the IRS and request that the tax lien be withdrawn from your credit report. You can 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.

  • Charging up to a card’s limit will hurt your credit utilization ratio, which accounts for 30% of a credit score.
  • 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 to the bureaus. You can learn more about the risks of making late payments here.

Jill Krasny contributed reporting.


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  • 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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