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Tax Debt and Your Credit Score

If you owe back taxes, the IRS does not report the debt to credit agencies. In other words, your credit report does not show any balance due for taxes. However, if the IRS places a federal tax lien for non-payment of back taxes, the lien will appear on your credit report.

Usually, the IRS files a lien for amounts of $10,000 or more. Once the lien is filed, creditors are informed of the IRS’ claim, which substantially reduces the taxpayer’s ability to obtain credit in the future.

What is a Lien?

A lien is the government’s claim to a taxpayer’s property. A lien can be placed on real estate, personal property or financial assets; anything the individual owns or takes possession of for the life of the tax debt. A lien is placed after the taxpayer:

  • Does not respond to the IRS notices regarding the payment of tax debt
  • Avoids or refuses to pay the tax debt

The IRS sends various notices to inform the taxpayer of the amount owed.

How a Lien Impacts Credit Report

A lien limits the financial freedom of a taxpayer. When a lien is placed, the taxpayer cannot sell, rent, take a loan or get credit against property until the tax debt is resolved. Along with placing a lien, the IRS also files a public notice to alert creditors of the unpaid taxes. This hurts the taxpayer’s ability to rent or purchase houses, cars, etc. A lien may also negatively affect employment opportunities, as more companies are reviewing the credit reports of prospective employees.

To avoid damaging your credit rating, a tax debt should be resolved as quickly as possible. The IRS offers a variety of ways to resolve tax debts, suited to the different paying capacities of taxpayers.

How to Get a Lien Removed from Credit Report

The fastest way to get a lien removed is to pay the tax debt in full. When the IRS receives the full debt amount (including penalties and interest), they typically remove the lien within 30 days of the date of payment.

Taxpayers that prefer to pay their tax debt over an extended timeframe can apply for an Installment Agreement. An Installment Agreement allows payments in fixed monthly installments. For debt reduction, the Partial Payment Installment Agreement may be a viable option.

Other resolutions may be available, depending on the taxpayer’s unique circumstances. These include “withdrawal”, where the IRS removes the public Notice of Federal Tax Lien. This is subject to the taxpayer using the Direct Debit Installment Agreement to pay the tax debt.