Guide to IRS Tax Liens 

Summary

A tax lien can be one of the worst items to appear on your credit report.   It’s considered very negative and can cause your credit scores to drop significantly. Even worse, under federal law, unpaid tax liens can remain on credit reports indefinitely, though in practice credit bureaus may remove them after a decade or so. (Once paid and released, a tax lien must be removed seven years from the date it was filed.) 

There is a way to make tax liens disappear from your credit reports completely, and quickly, though. Unfortunately, not all taxpayers who are dealing with this problem know about it. A Notice of Federal Tax Lien -- “NFTL” in IRS parlance and just “tax lien” to the rest of us -- is a tool the IRS uses to let creditors and others know that it has an interest in your property because of tax debt you still owe. If you can't pay your taxes, the IRS may file one of these (it's automatic when the amount owed is $10,000 or more). 

When it does, it is typically picked up and reported by the major credit reporting agencies. Credit scoring models consider tax liens very negative, and they can have an effect on credit scores similar to bankruptcy or judgments. The Taxpayer Advocate noted in its report to Congress that as of March 2013, the IRS had filed 307,842 NFTLs. (Figures reported are for the fiscal year.) While that’s a decline of 50% over the same period in 2011, it’s still a lot of people who have been affected. And, of course, the cumulative number of people with this problem is much higher. 

What many people don’t know is that in 2011 and 2012, the IRS implemented something called the “Fresh Start” initiative, which is a series of procedures and policy changes directed toward taxpayers facing collection from the IRS. One of the changes includes a policy that allows certain taxpayers to request that their tax liens be withdrawn, even before the underlying tax debt has been paid. Under this policy, a taxpayer can request the tax lien be withdrawn in certain circumstances that we’ll describe in a moment. 

The Taxpayer Advocate reports that as of March 2013, the IRS issued 6,845 lien withdrawals, an increase of 18% over the same period in 2012. While that’s great news for the nearly 7,000 people who managed to get these taken care of, there are still far more who may qualify but are not aware of the program or don’t know how to take advantage of it. 

Do you have a tax lien on your credit reports? Here’s how to take advantage of the Fresh Start initiative. 

1. Determine If You Qualify

You can qualify to request your lien be withdrawn, if:

• Your tax liability has been satisfied (you’ve paid what you owe) and your lien has been released;

• You are in compliance for the past three years in filing your individual and business returns, and information returns (as applicable) and;

• You are current on your estimated tax payments and federal tax deposits, as applicable.

• Even if you haven’t paid the IRS what you owe, you may be able to qualify for this program if you currently owe $25,000 or less and have entered into a direct debit installment agreement where your payments to the IRS are taken from your bank account automatically. There are other requirements you’ll need to meet, including that you have made at least three direct debit installment payments successfully and that you have not defaulted on a previous installment agreement.

2. Apply to Have The Lien Withdrawn

If you believe you qualify, fill out IRS Form 12277, Application for Withdrawal. It’s a fairly simple one-page form, with one page of instructions. Complete it and send it to the IRS per their instructions. If the IRS approves your request, it says it “will file Form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien, in the recording office where the original NFTL was filed and provide you a copy of the document for your records.” 

This means you will have a written record that the lien has been withdrawn. You can ask the IRS to then notify the credit reporting agencies of the withdrawal, or you can supply that notice to them yourself. Once the credit reporting agencies process your request, the lien will be withdrawn and your credit report and scores will treat it as if it never existed.

3. Will It Help My Credit Scores?

Getting a negative item like this one removed from your credit reports will often help your credit scores. But how much will your credit scores change when the tax lien is withdrawn? It depends on a number of factors, including how old the lien is and what other type of information is in your reports. For that reason, it would be smart to review your credit score before the lien is removed and then continue to monitor it after the fact.