How Much Can a Notice of Federal Lien Hurt Your Credit Score?

When you owe taxes to the federal government and do not pay your tax liability, the Internal Revenue Services (IRS) will file a lien against your property. You will then receive a Notice of Federal Tax Lien notifying you that the lien was filed. IRS liens automatically attach to all of your assets, such as your home and vehicle, and damage your credit score.

Tax Liens

A tax lien is a matter of public record and along with bankruptcies, judgments and foreclosures, serves as one of the many derogatory public records that can appear on your credit report. All of the data reflected on your credit report contributes to your credit score. Credit scores help lenders evaluate your debt-management skills and determine how likely you are to make timely payments. Derogatory public records that demonstrate your inability to manage your debts adversely impact your credit scores. Thus, you can expect your credit score to drop after a tax lien appears on your report.

Time Frame

According to the Fair Credit Reporting Act, most derogatory information on your credit report only contributes to your credit rating for seven years. After seven years, the credit bureaus purge your report of most negative entries. Paid tax liens are no exception. If you pay off your tax lien the reporting agencies delete it from your credit record seven years after the date you paid the debt in full. Not paying a tax lien will haunt your credit history for much longer. Each reporting agency decides how long it will report unpaid federal tax liens. Although reporting agencies have the right to maintain your tax lien indefinitely, most unpaid tax liens will vanish after 15 years.

Considerations

Paying off your tax lien does not result in the reporting agencies removing it from your credit history. The full seven-year reporting period must pass before your paid tax lien is deleted. Paying the lien also does not improve your credit score because the lien record itself is derogatory -- whether you paid it or it remains outstanding. Lenders reviewing your credit history, however, would much rather see a paid lien than an unpaid one. The fact that you took responsibility for your delinquent tax debt reflects more favorably on your future debt management skills than liens you ignore.

Credit Damage

While a tax lien does damage your credit rating, that damage is the most prominent when the tax lien is recent. Recent entries, whether positive or negative, carry the most weight with the credit-scoring system. As the tax lien ages, it has less of an impact on your credit score.