How a tax lien affects your credit report and credit score:
If a tax lien makes its way onto a credit report, it can have catastrophic effects on the credit score. In case your credit score is around 700, you may experience a 60-100 point drop. Leins shows up under the “public records’ section of the credit report and unlike other derogatory accounts, which fall off within 7 years, a tax lien can plague the credit report for up to 10 years.
Beware: Paying off a tax lien doesn’t delete it or increase your credit score:
Unfortunately, even if the lien is satisfied and paid off with the IRS, the tax lien will continue to appear on the report as a “released lien,” which continues to adversely affect the credit score.
Additionally, creditors will view this account negatively since the lien is part of the credit history and that implies the applicant has suffered financial hardships in the past and is, therefore, a high risk.
Why Credit Bureau disputes are not effective to remove Tax Liens:
Unlike finance accounts, where the creditor furnishes the information directly to the 3 credit bureaus, lien reporting works quite differently. The IRS does not communicate with the credit bureaus; instead, the IRS simply files a tax lien in at the local county clerk’s office.
Public records are collected by large data repositories, one of them being Lexis Nexus. The credit bureaus have contracted with Lexis Nexus to provide them with the public record information it has mined from the local courts. Therefore, Lexis Nexus acts as a middleman in the reporting of tax this lien, which means liens. Because of this, liens may take longer to show up on the credit report and also take longer to update once they are paid off.
When a dispute is lodged with the credit bureaus to investigate a tax lien, the bureaus never contact the courts. Instead, they simply cross-reference the Lexis Nexus system to verify the lien. This results in a low chance of success for tax liens disputed with the credit bureaus. As discussed earlier, the most effective and legitimate way to remove a tax lien is by getting to get it withdrawn. Once a lien is withdrawn, it is, in effect, removed from the court records, which leads to deletion of the tax lien from the credit report. It also ensures that the lien will not reappear on the credit report in the future. So now, let’s discuss how to get a lien withdrawn.
How to delete a tax lien from the credit report and increase your credit score:
The only way to get the credit score back to its prior level is to get the tax lien deleted in entirety from the credit report. Instead of a “lien release,” a “lien withdrawal” needs to be acquired from the IRS to get the lien deleted. There is a procedure that can be followed to get this lien off the credit report and simply disputing the IRS lien with the credit bureaus is not an effective method, The only way to get this tax lien removed in entirety is to get the lien “withdrawn.” and removed in its entirety. More on that later, but first let’s look at how a tax lien is reported on the credit report.
How to get get the IRS to issue a lien withdrawal:
Firstly, as discussed, the way to get a tax lien deleted from the credit report begins with getting the lien withdrawn from the court.
The IRS allows for withdrawal of a tax lien under certain conditions in its “Fresh Start Program” Under this program, a case for lien withdrawal can be made under the following circumstances:
- The tax lien is paid off in full
- The individual is in an IRS payment program to pay the full amount due, with a balance below $25,000.
- The lien was filed in error.
Exceptions and Appeals Process for lien removal:
Although this program requires that the IRS lien is paid in full instead of a negotiated settlement, the IRS may consider making exceptions and exemptions in certain cases. The same applies to having a balance over $25,000. Here too, the IRS may consider withdrawal of the lien, if it is determined that the lien withdrawal would facilitate the collection of the outstanding balance.
The exceptions mentioned above can be obtained by following an appeals process. The IRS allows for appeal after it has turned down an initial withdrawal request.
What happens once the withdrawal is received, how to file and update bureaus:
Once a lien withdrawal notice is obtained from the IRS, it must be forwarded to the credit bureaus. This will ensure removal of the lien from the credit report within 30 days. You can use this sample credit bureau dispute letter to send to the IRS along with a copy of the lien withdrawal.
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