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What Is a Tax Lien? State Tax Liens, Federal Tax Liens, and How They Affect You

5 min read
Sean Messier Michelle Black By Sean Messier and Expert reviewed by Michelle Black Apr 08, 2019 | Updated May 05, 2019

In the days of yore, public records, such as tax liens and judgments, would show up on personal credit reports and could deal direct damage to your credit scores. But in an effort to keep credit reporting errors to a minimum, policies have since been changed. As a result, certain public records no longer play the role they once did in the world of credit.

Now, neither tax liens nor judgments have any effect whatsoever on your personal credit reports or scores.

Even so, there’s no guarantee that credit reporting policies surrounding tax liens and judgments will never change again.There are no laws that would prevent this from happening either. The policy change that removed tax liens and judgments from credit reports was the result of a decision made by the nation’s three major consumer credit bureaus (as part of a settlement known as the National Consumer Assistance Plan – see more below).

Because there’s no promise that tax liens will be gone from credit reports forever, it’s likely worth brushing up on exactly what tax liens are, how they work, and how to remove a tax lien from your credit reports in the off chance that you ever do find one there.

What Is a Tax Lien?

By definition, a lien refers to the “right to keep possession of property belonging to another person until a debt owed by that person is discharged.”

Fittingly enough, a tax lien can be filed by a governmental body, whether that’s the IRS, your state, your city, or your county, as an attempt to force you into paying an outstanding tax obligation — your unpaid taxes. Tax liens protect the government’s legal claim to seize your money and/or property (including real estate) if you fail to pay your taxes (whether they’re income taxes, state taxes, or back taxes of any kind).

When a tax lien is filed against you, the IRS will send you a Notice of Federal Tax Lien. Other governmental bodies will send different notices.

Tax liens are public records, so they’re visible to anyone who wants to look for them. Credit bureaus used to actively seek these records in order to add them to credit reports. But, as mentioned earlier, this is no longer the case.

Do Tax Liens Affect Your Credit?

For a long time, tax liens and other public records, like judgments, did appear on your credit reports. They typically had a negative impact on your credit scores and made it harder to qualify for credit cards and loans.

The good news? This is no longer true. Some public records, like bankruptcy, are still intertwined with your credit. Tax liens are not.

When used strategically, bankruptcy can offer you some relief from an unmanageable debt situation. Just be sure to weigh all your other options first and dig deeper into how bankruptcy impacts credit before you decide to use it.

Since tax liens don’t pop up on your credit reports, they no longer have any effect whatsoever on your credit scores.

The reason behind this credit reporting policy change can be traced back to a 2015 settlement between the three major credit bureaus — Equifax, Experian, and TransUnion — and 31 state attorneys general. The settlement led to an agreement that’s known as the National Consumer Assistance Plan (NCAP). NCAP triggered a variety of policy updates designed to bolster the accuracy of the bureaus’ credit reporting practices.

In the immediate wake of these updates, certain judgments and tax liens still remained on credit reports. But over time, policies were updated further. By the end of April 2018, all judgments and tax liens had been removed from personal credit reports.

Here’s the catch. It’s not illegal for tax liens to appear on your credit reports. It’s just been agreed upon that they won’t, and that’s just for the time being. That’s not to say you should assume this policy will change — but you shouldn’t assume it won’t.

Plus, the exclusion of tax liens only applies to consumer credit reports from Equifax, TransUnion, and Experian at the moment. Liens can still show up on other consumer reports, like the LexisNexis RiskView Liens and Judgments Reports. Mortgage lenders may use this report to see if you have any outstanding liens or judgments filed against you. So, while a lien might not show up on your traditional credit reports or damage your credit scores, your back taxes could still cause you problems if you’re trying to buy a home.

Liens can also still show up on business credit reports. It’s important to make sure you’re on top of your owed corporate taxes if you own or manage a business.

If you find a tax lien on one of your credit reports, you should file a dispute with the relevant credit bureau to have it removed. Since it clearly shouldn’t be there under current credit reporting policy, the tax lien removal process will likely be a breeze.

How Should You Address a Tax Lien Now?

Tax liens won’t devastate your credit under current reporting policies. Yet they can still loom overhead, causing stress and financial trouble just like any debt. The best approach in such a situation is always to pay off the debt as soon as possible, but the reality is that you likely wouldn’t be dealing with a lien if that weren’t the problem in the first place.

If you’re dealing with a sticky tax situation, there are a few potential solutions you can consider. The options below are presented with federal tax liens in mind. State and county tax liens may need to be dealt with differently. You should contact the appropriate governmental body if you have any questions about how to proceed.

Offer in Compromise

If you’re unable to pay off the debt required by a tax lien outright, you can apply to make an offer in compromise with the IRS. An offer in compromise might allow you to settle your outstanding tax obligations without paying the full amount. Whether you’re able to qualify will depend heavily on your unique situation.

Installment Agreement

Don’t qualify for an offer in compromise? Look into an installment agreement. These arrangements let you settle the full debt through a fixed payment plan. Your outstanding balance will accrue interest if you take this route.

Payment Extensions

A fresh tax debt can probably be dealt with through a payment extension. If you just need a bit more time to pay your taxes, the IRS might give you a 120-day extension to pay your taxes in full. If your account is already in the hands of IRS collections, however, you’ll be stuck with a 60-day extension.

Either way, this is another route where your outstanding balance will incur interest.

Currently Not Collectible Status

Currently not collectible (CNC) status is reserved for situations when you simply can’t handle both your taxes and reasonable living expenses. To qualify, you must have filed all your tax returns and you’ll have to prove that you’re struggling financially.

Once CNC status is granted, the IRS will continue to apply interest and penalties to your outstanding balance. The agency will also send you an annual bill, per federal law. But, for the time being, the agency won’t try to collect directly from your property or income.

That said, even if you’re protected by CNC status, the IRS will likely keep your tax refunds until your outstanding balance is paid in full.

Personal Loans

Many payment options available through the IRS require you to pay interest and sometimes penalty fees. Interest and fees can add up. Sometimes you might be able to save money by borrowing money to pay your tax obligation outright.

If the IRS is going to charge you 6% interest and you can find a personal loan with a lower interest rate, using a personal loan to pay your tax bill could save you money in the long run. Plus, using a loan to pay off your tax obligation may help you avoid accruing penalty fees like late-filing and late-payment.

A personal loan will also feature a fixed interest rate. The IRS, on the other hand, adjusts its interest rate — for the good or the bad — every quarter.

Dealing With Your Debts

If you’re struggling to deal with a tax lien, there’s a good chance that you’re grappling with other debts that may be chipping away at your credit as well. There’s no one-size-fits-all solution for these types of situations. But there are several debt repayment strategies that can make it easier to pay down and manage your debts.

As you take care of your debts, it’s also a good idea to repair your credit as you work toward long-term financial stability.

Want to read more about your credit and how to improve it? Learn how to build credit effectively in the Insider Academy.
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