How to Remove a Tax Lien from Your Credit Report

In a nutshell, a tax lien is filed against your property when you don’t take care of your tax debts, notes the Internal Revenue Service (IRS). The filing, which is referred to as a Notice of Federal Tax Lien, is used as a means to communicate to creditors that the government has first dibs on your assets and property to recover the debt owed to them.

How do tax liens impact your credit score?

Tax liens have serious implications for your credit score, and you should expect a steep increase of 100 or so points, if not more. But the impact on your credit score is the least of your worries.

The low credit score resulting from the tax lien makes it harder to qualify for the best interest rates, could possibly disqualify your a job, raise your insurance rates, or trigger higher deposits. But a tax lien placed against you by the IRS also means that they can legally seize your property and sell it to cover your tax obligation.

In other words, any personal assets, real estate, financial accounts, or business assets and real estate you have could become their property. Even worse, lenders may be reluctant to extend credit to you because not only do you pose an elevated risk, but they could lose out big time if you default as the IRS will have first dibs to your assets.

How long will a tax lien remain on your credit report?

Paid tax liens

If you pay your tax lien in full, it will remain on your credit report seven years from the date the lien is paid in full.

Unpaid tax liens

Unlike other negative items that drop off your credit report after seven or ten years regardless of their status, unpaid tax liens remain indefinitely.

An important note

You should be aware that the IRS does not report tax liens to the credit bureaus. Instead, they appear as a public record. In addition, tax liens are not dischargeable in bankruptcy.

Is it possible to remove a tax lien from your credit report?

While it’s possible to have a tax lien removed from your credit report, don’t bank filing a dispute and it automatically being removed due to a lack of response from the government.

Request a withdrawal

One of the most effective ways to go about having a tax lien removed from your credit report is by requesting a withdrawal. According to IRS.gov, “A “withdrawal” removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property.”

To file a withdrawal, you’ll need to complete IRS Form 12277. The eligibility requirements are as follows:

  • You have entered into a DirectDebit Installment agreement
  • Your outstanding tax liability is $25,000 or less
  • You’ve remitted at least three consecutive payments via direct debit
  • You’re in good standing on your current Direct Debit Installment agreement and have not let any of your prior agreements lapse

To complete Form 12277, you’ll need to provide the following information:

  • Identifying information (i.e. name, address, Social Security or Employer Identification Number)
  • A copy of Form 668: Notice of Federal Tax Lien (You can also provide the serial number, date, and office where the initial Form 668 was recorded)
  • Status of the federal tax lien (i.e. open, released, or unknown)
  • The reason you are requesting a withdrawal
  • A written statement to substantiate your request

But you should know that a withdrawal doesn’t get you off the hook for what you owe. Instead, it simply removes the lien from your credit report so your score can start recovering sooner than later. (And it’s only available for those who aren’t under a settlement agreement). Furthermore, it lowers your level of riskiness in the eyes of creditors.

You may want to pay the lien in full and request that it be removed after the fact. However, this will be recorded by the IRS as a release and will still be reported for seven years from the date the lien was paid in full.

Seek professional help

Does the thought of working with the IRS to get a withdrawal or submitting written requests to the credit bureaus to have the tax lien removed frighten you? If so, the investment made when seeking professional help will be well worth the outcome.

Tips to help rebuild your credit after a tax lien

You can take the following actions to start rebuilding your credit after a tax lien:

  • Make timely payments on all other debt and credit products
  • Keep balances on revolving credit (i.e. credit cards) at 30 percent or lower
  • Maintain a healthy mix of revolving and installment credit
  • Refrain from applying for new credit
  • Don’t close any of your existing credit cards
  • Apply for a credit builder loan
  • Consider opening a secured credit card

By taking these actions, you will start to see your score climb. And once the tax lien is removed, expect it to be at the same level or higher than it was before the lien appeared on your credit report, assuming no other serious delinquencies are present.

The bottom line

Tax liens can have harsh consequences for your credit and finances. But there are several methods available to have them removed. And by managing your credit accounts responsibly, you can start to see improvements to your credit score sooner than later.

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