What is a Tax Lien on Your Credit Report?

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What Is a Tax Lien?

A tax lien is a right—usually by the county, state, or federal government—to take possession of your property or assets due to a delinquency on property or income taxes. In the case of property taxes, the property is sold because of an unpaid tax lien. Or, you may also default on your mortgage loan.

A tax lien shouldn't come as a surprise to you. The government will have sent you several notices and bills for the taxes due before finally filing a tax lien on your property. You should not take these notices lightly.

Preventing a Tax Lien

You can prevent a Federal tax lien from being filed if you're able to pay the tax in full, prior to a lien being filed by the IRS. If you're unable to do that, you can also prevent a lien by setting up a guaranteed installment agreement or a streamlined installment agreement with the IRS that meets their requirements for avoiding a line filing. If doable, this is always a preferred option for taxpayers who want to protect their credit standing.

Liens Should Not Be Confused With Levies

Some people use the words "lien" and "Levy" interchangeably, but that's a mistake. A tax lien is (very specifically) a document that the IRS files to ensure its ability to collect money. A levy, on the other hand, is the forced collection of taxes due.

Tax Liens and Your Credit Report

Tax liens are public record, on file with your local court, and appear in the public records section of your credit report. They're considered to be one of the most negative credit report entries and can damage your credit score similar to a bankruptcy or foreclosure.

A tax lien entry on your credit report can keep you from getting approved for future loans, credit cards, apartment rentals, even a job. The normal credit reporting time limit doesn't apply for unpaid tax liens. They can remain on your credit report indefinitely, but the credit bureau may remove it within 10 to 15 years depending on their policies.

Paid tax liens can remain for seven years unless the tax lien is withdrawn. When a tax lien is withdrawn, it's almost like the tax lien was never filed in the first place. However, you may have to send the credit bureaus documentation indicating the tax lien withdrawal in order to have the tax lien removed from your credit report.

Removing a Tax Lien From Your Credit Report

If you have a Federal tax lien, you can have the lien withdrawn and removed after you've satisfied the tax obligation, you've filed your tax returns for three years, and you're current on any estimated taxes and federal tax deposits. Certain taxpayers may also be able to have the tax lien withdrawn by entering a direct debit installment agreement with the IRS allowing the IRS to automatically withdraw regular tax payments from your checking account.

Your state may offer a similar tax lien withdrawal, but you'll have to contact your state department of revenue to find out what you need to do in order to qualify. In the absence of a process for tax lien withdrawal, the tax lien, if paid, will follow the normal credit reporting timeframe.

If you're having issues with a tax lien, the smart move is to consult a tax professional about the best way to proceed. Otherwise, a tax lien can haunt you for years and wreak havoc with your life.