It should go without saying that tax liens, whether they originate at the state level or the federal level, should be avoided at all costs, especially if you’d like to maintain solid credit scores.
Tax liens are among the worst items to have on credit reports. Not only do they have the potential to destroy your credit scores but they can also remain on your credit reports indefinitely if not paid.
Similarities of state and federal tax liens
State and federal tax liens are considered serious derogatory items by both the FICO and VantageScore credit scoring systems.
If they do impact your scores they will impact them equally, as a federal tax lien isn’t any worse than a state tax lien. Even paid and released tax liens are problematic.
Neither the IRS nor the state or local tax authority report tax liens to the credit bureaus. That’s not how tax liens end up on consumer credit reports.
Instead, the credit bureaus will proactively seek out tax lien information through public records vendors like LexisNexis and insert the information onto consumer credit reports themselves. This is different than their normal procedures where lenders and collectors send them information each month.
Unpaid tax liens, both state and federal, don’t have a credit reporting statute of limitations per the Fair Credit Reporting Act. In other words, unpaid tax liens do not follow the so-called “7 Year Rule” which requires that most types of derogatory information be removed from a consumer’s credit reports after a period of seven years.
Since there is no credit reporting statute of limitations applied to unpaid tax liens they can remain on consumer credit reports indefinitely or until the credit bureaus choose to remove them. This gives them the potential to be the longest lasting derogatory item on your credit reports.
Withdrawn liens vs. released liens
Thankfully, paid tax liens do not remain on a consumer’s credit report indefinitely. When a tax lien is paid the court record is updated from a “filed” status to a “released” status. Released equals paid.
Paid and released tax liens are not automatically removed from a consumer’s credit reports. Released liens are removed from a consumer’s credit report after seven years from the date of release. Read that again: Seven years from the date it was released, not the date it was filed.
In 2011 the IRS introduced a new set of policies for federal tax liens known as the Fresh Start Program. The program gives taxpayers have an incentive to pay their federal tax liens in full.
When a taxpayer pays his lien in full, or enters into an approved repayment program to pay the lien in full over time, the taxpayer can petition the IRS for the lien to be withdrawn rather than merely released. (To request a withdrawal for a paid tax lien a consumer should use IRS Form 12277.)
The good news for consumers is that the credit bureaus do not currently report withdrawn tax liens on consumer credit reports. Once a tax lien has been withdrawn, and they become aware of the withdrawal, the credit bureaus will remove it.
You may need to file a dispute with the credit bureaus to instigate an investigation on their end and if you have a copy of the withdrawal paperwork it’s a good idea to include it.
How do you go about taking a state tax lien off that was found to be not owed. Do I dispute it through the agencies and let them research it?