Do Federal Tax Liens Affect Credit Scores?

A federal tax lien may not be the most damaging item you can have on a credit report, but it can last far longer than any other item in a credit history. Unlike most other items on a credit report, you can remove a tax lien just by paying it. You can even remove the tax lien before paying the entire bill.

Identification

A federal tax lien is one of the deadliest items that can appear on your credit report. While the impact of a tax lien depends on the other factors in your credit report, such as the presence of negative accounts and debt loan, a lien usually takes off over 100 points on a credit score. For consumers with a score of 780 or above, the lien can damage their rating by 150 points or more, according to Jeanine Skowronski of Mainstreet.

Time Frame

A paid tax lien stays on a credit report for seven years, but the Fair Credit Reporting Act allows the national credit bureaus to report an unpaid tax lien indefinitely. As of 2011, TransUnion and Equifax report unpaid tax liens indefinitely, but Experian only lists them for 15 years. Some states place tougher restrictions on the reporting of tax liens. For example, California limits the federal credit reporting time period to 10 years for unpaid liens.

With Tax Lien

As of February 2011, the Internal Revenue Service (IRS) withdraws tax liens when the taxpayer pays a lien in full. However, the IRS does not automatically withdraw a paid tax lien. You must file Form 12277 Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. You must attach a copy of your federal tax lien and documentation that proves you paid your lien, such as a receipt from the IRS.

Tip

You can request the IRS withdraw the tax lien as soon as you make an installment agreement with the IRS in lieu of paying the bill in full. However, the installment agreement must eventually repay the debt in full. Also, the IRS only agrees to an installment plan if you only owe tax for one year. You may not receive an installment plan if you owe more than $25,000 in taxes. For tax debt less than $25,000, you can request an installment plan at the IRS website.