Thursday, September 3, 2009

Tax Liens & Credit Ratings

A tax lien will affect the sale of your property and hurt your credit score so much that a lender might consider you too risky for credit. If you have a tax lien, the government has laid claim to your property because you could not meet some type of tax obligation, such as Social Security or disability tax. Taking care of your tax debt should be your most immediate concern, because it can haunt you longer than other negative information.

Impact

    The true impact of a tax lien has dozens of variables, so there is no standard amount by which a lien will lower your score. The FICO scoring model is the commonly used formula in the lending industry, but several others exist, such as the VantageScore. Credit score formulas, however, view judgments, such as a tax lien, as a serious negative mark. You may see a drop in your score of 100 points or more if you had excellent credit before the lien.

Time Frame

    The federal government can collect on any tax lien issued after Nov. 6, 1990, for as long as 10 years. This does not mean it affects only your credit score during this time. Credit rating agencies report unpaid tax liens for 15 years. Paid liens remain on your report for seven years, according to Experian.

Improvement After Removing the Lien

    A tax lien will improve your score when you settle your debt. How much is connected to other information on your report. If you already have one debt you cannot pay, you might have trouble on other accounts, such as late payments or a collections account. The more negative information on your report, the less a tax lien matters to your score.

Removing the Lien

    You must obtain a Release of the Notice of Federal Tax Lien to officially remove the lien from your record. This means you must pay off your debt or wait until the IRS cannot legally collect on it. One you receive a tax lien discharge, the IRS will probably remove the lien in about 30 days. You will have to dispute the lien with the credit bureaus to get it off your report. The IRS often does not bother responding to dispute requests once you pay your tax debt, so there is a good chance of success.

Tip

    The IRS sometimes takes less than the full amount of your tax -- called an "offer in compromise." You might be able to swing a removal of the lien from your credit report if the IRS accepts your offer. Keep in mind that the IRS does not accept offers if it thinks it can collect on the entire tax bill.

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