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

Sean Messier

Sean Messier | Blog

Apr 08, 2019 | Updated Apr 23, 2019

In the days of yore, public records, such as tax liens and judgments, would show up on personal credit reports and deal direct damage to your credit scores. But in an effort to keep credit reporting errors to a minimum, policies have since been changed, and 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 these policies will never change again, and there are no laws that would prevent this from happening. The change was simply the result of a decision made by the nation’s three major consumer credit bureaus. So 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 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. These liens protect the legal claim of the body in question to claim your money and/or property (including real estate) upon failure to pay said taxes, whether they’re income taxes, state taxes, or back taxes of any kind.

The IRS will send you a Notice of Federal Tax Lien, while other governmental bodies will send different notices.

Tax liens are public records, so they’re visible to anyone who wants to know 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 and had a negative impact on your credit scores. They 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 be a beneficial debt management move. Just be sure to weigh your other options 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 change can be traced back to a 2015 settlement between the three major credit bureaus — Equifax, Experian, and TransUnion — and 31 state attorneys general. This settlement led to an agreement that’s known as the National Consumer Assistance Plan (NCAP), which in turn 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, and by the end of April 2018, all judgments and tax liens were eliminated 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 will change — but you shouldn’t assume it won’t.

Plus, the exclusion of tax liens only applies to consumer credit reports at the moment. Liens can still show up on business reports, so make sure you’re on top of your owed 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, 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, but 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. However, the options here are presented with federal tax liens in mind — state and county tax liens may be dealt with differently, so 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, the IRS may let you provide an offer in compromise. This 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, and it requires you to prove that you’re struggling financially. You must have filed all your tax returns to qualify.

Once CNC status is granted, the IRS will continue to apply interest and penalties to your outstanding balance, and it will 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.

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. There’s no one-size-fits-all solution for these types of situations, but there are several debt repayment strategies that can make the process quicker and easier.

And, as you take care of these debts, make sure you’re equipped 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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