Debt is such a dream killer.
It has a way of “strangleholding” your best-laid plans and keeping you from things like…
…buying a house
…taking a vacation
…making a career change
…building a good retirement
…starting or expanding a business
The list could go on.
A particularly difficult kind of debt that can hold you back is tax debt.
I have clients who come to me with deep tax problems all the time. They often feel trapped by their unpaid tax debt, like there’s nothing in their lives that Uncle Sam can’t touch.
But actually, that’s not true.
For one thing, IRS tax liens aren’t supposed to affect your credit score anymore. The major credit reporting bureaus — Experian, TransUnion, and Equifax — stopped including Notices of Federal Tax Liens (NFTL) on taxpayers’ personal credit reports in 2018 as part of an extension of the National Consumer Assistance Plan.
But as with most “plans,” it’s a good idea to make sure they’re still operating in your favor — and that you’re aware of the damage a lien can do elsewhere in your finances.
Let me equip you with some facts about just how far Uncle Sam’s reach actually is and how you can remove a tax lien from your credit report.
Credit common sense
As of April 2018, all three major credit reporting agencies decided to drop tax liens from their reports. This means that if you spot one on your report, you can take action.
First, you have the right to get free copies of your credit report from each of the three major credit bureaus once every 12 months. (You can also get free credit reports from AnnualCreditReport.com.) Dispute any federal tax liens the same way as you would other wrong information on your report. File a dispute ASAP depending on which credit bureau is in error: Experian, TransUnion, or Equifax.
Again, as with any error on your report, you can also file a statement that creditors will see on your credit report in the future and submit a complaint to the Consumer Financial Protection Bureau.
Other kinds of damage
But back to your tax problem and how to remove a tax lien from your credit report.
An unpaid tax lien may not be on your report, but it can cause trouble for your credit in other ways. They operate like judgments against you where your creditor (the IRS) can take your property to satisfy the debt: your bank account, wages, car, retirement accounts and other assets, personal and business real estate (including biz assets like accounts receivable), or your home.
That sends an obvious ripple through the rest of your finances. Immediately, all your assets are at risk.
A federal tax lien also makes it tough to sell your home, as the purchase price goes towards your debt first — not to mention it’s going to be harder to find a buyer. And when a lien (the legal claim by the IRS to collect the taxes you owe) turns into a levy (the seizure of your property), all other creditors know (or will soon be told by the IRS) that they’ll have to stand in line behind Uncle Sam for your money. They’ll naturally balk at floating your credit… and that unfortunately includes most loans. Not even bankruptcy can always shield you from the feds.
Addressing the root problem
So, if you’re asking how to remove a tax lien from your credit report, here is the best way to get a lien off your general credit: Attack your tax debt.
You can check your federal tax lien with an online IRS account. You’ll be able to see exactly what you owe, how to talk to the IRS, and how you can begin whittling the debt down. When you begin to pay your debt off, a federal tax lien is often withdrawn.
With an online account, you can also set up a payment plan with the IRS to pay off the taxes you owe. When you request a payment plan — aka an installment agreement, with 3 to 10 years to pay — the IRS is generally prohibited from levying, and the time to collect is suspended or prolonged while an installment agreement is pending. If the agreement is denied and you appeal that decision, the collection period is suspended for however long a final decision takes.
Getting a withdrawal
The IRS may consider withdrawing the NFTL depending on your type of installment plan, or they may determine that lifting it will help collect from you. (For example, the NFTL may be impeding your ability to make money to pay back your taxes.)
You can also apply to have it withdrawn by filing the 12-question IRS Form 12277, “Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.” If they do withdraw the NFTL, the IRS will file a Form 10916, “Withdrawal of Filed Notice of Federal Tax Lien,” and give you a copy.
Even if the lien is withdrawn, you still have to pay whatever’s left on your balance. There’s no getting around that as the best way to improve your tax situation — and your credit.
Though it may feel insurmountable, big tax debt doesn’t mean you give up. In fact, being equipped with the knowledge of what’s involved and how it affects you can be empowering. And knowing how to remove a tax lien from your credit report is the right place to start. Plus, we’re always here to help clients like you make it through to the other side.
Looking out for you,
Emelia Mensa, CPA