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A credit score is a three-digit number that is the key to your financial life. Creditors use that three-digit number to determine if you are worthy of credit.
Credit scores are determined by a person’s payment history, the amount they owe, length of credit history, new credit, and types of credit used. The higher the score, the worthier of a loan the person is deemed.
A tax lien is the government’s claim against a consumer’s assets, and it negatively impacts credits cores. A tax lien is placed when a consumer fails to pay a tax debt. This includes income, property, and other types of taxes.
If the government decides to issue a tax lien, it must file a Notice of Federal Tax Lien. This document alerts creditors that the government has the right to the property in question.
Then, the lien makes its way to credit reports. The credit bureaus put it on your credit report, and the score plummets.
Dealing with a tax lien is frightening, but all hope isn’t lost. Those who have tax liens have some tools they can use to remove it from their reports.
First, though, it’s important to understand the true impact a tax lien has on a credit score.
Tax Liens and Credit Scores
A tax lien is considered to be as bad as filing bankruptcy. It can cause a credit score to go down by as much as 100 points. That can cause consumers to either no longer be eligible to receive credit or to only be able to get it at a much higher interest rate.
Some consumers noticed that their tax liens were removed from their credit reports on July 1, 2017. That is when new standards regarding adding public records to credit bureau databases were enacted.
Due to the new guidelines, tax liens have to be removed from credit reports if they do not contain the consumer’s:
- Social Security number or date of birth
What happens if the tax lien meets the criteria and remains on the report? Consumers can use the Fresh Start Program to remove the lien.
>> Read More: What Affects Your Credit Score?
Filing for a Withdrawal Using the Fresh Start Program
While people cannot make their tax liens magically go away, they can make their situations better by filing for a withdrawal via the Fresh Start Program. The withdrawal removes the notice of the lien and allows consumers to take it off their credit reports.
Consumers can file Form 12277, Application for the Withdrawal of Filed Form 668, Notice of Federal Tax Lien, if they meet certain criteria.
The easiest way to do this is to pay the tax lien and file all tax returns on time for three years in a row. The taxpayer must also be current on estimated tax payments and federal tax deposits. Those who meet the criteria can file the form for the withdrawal.
Those who have not paid off the lien can still file the form, but they must meet the criteria. They must owe $25,000 or less in taxes and enter a direct debit installment agreement. The agreement must be set up so the debt is paid back before the collection statute or within 60 months, whichever one occurs sooner.
Those who have defaulted on previous installment agreements likely won’t get approved. In addition, the IRS requires that at least three installment payments have already been made before approval.
Those who are approved for a withdrawal should send the paperwork to the three major credit bureaus to have the tax lien removed. While they can ask the IRS to do this, it is better for consumers to take care of it themselves.
Check for Errors
Consumers also have the option of making sure that the tax lien information is accurate, and if it is missing any of the required information, having it removed. However, if the information is submitted by the IRS at a later date, the tax lien will reappear on the credit report.
A tax lien is a serious problem, but consumers should not give up. Those who make a serious effort to repay the lien can take advantage of the Fresh Start Program. People might feel as if they are alone, but this program helps them get back on their feet.
Once the tax lien is withdrawn, their credit scores go back up. It’s as if the tax lien was never on the credit report in the first place.
Author: Jeff Gitlen