How to Remove a Tax Lien from Your Credit Report

When you get a copy of your credit report, you may be surprised at some of the information that’s actually included. Some of it is negative and can hurt your chances to be approved for credit or loans.

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It pays to know what information is on your credit report before you apply for a credit card or loan. However, if you see negative information, you may be tempted to give up. But not so fast: it’s often possible to get derogatory information removed so that your credit history looks much better to potential creditors.

One of the most devastating accounts to have on your credit report is a tax lien. It can ruin your chances to be approved for many types of credit. However, it is possible to have it removed as long as you know what to do. Learn more about what a tax lien is, the different kinds of liens, and the steps to take to get one removed from your report.

What is a Tax Lien?

When a person fails to pay their federal or state taxes or an estate tax, the governing agency involved may file a tax lien. It can vary based on the details for each situation, but it is basically the government staking a claim on some of your assets to recover taxes that are owed.

If you attempt to sell your asset, the government agency has the right to receive the proceeds from the sale up to the amount that you owe. The most common asset claimed in a tax lien is real estate, but it is not limited to this type of property. Having a lien on your asset limits your ability to sell because most buyers want a clean title.

While the IRS, or state or county government, may file a tax lien against you, they are not the only ones capable of doing so. You may also discover that a company filed a lien for an outstanding bill. One of the most common situations is when you have a house built. If you owe the builder money, they will put a lien on the home until you have paid the debt.

How a Tax Lien Affects Your Credit

A tax lien has a negative effect on your credit and is one of the most serious delinquencies reported on your credit history. In fact, when you fill out applications for some credit accounts, you will be asked if you have any judgments or liens on your credit history. In many cases, just one of these is enough to be denied credit altogether.

A tax lien lowers your credit score, just like any other negative mark. It shows up under the section for public records with the date that it was added. As with any other credit information, the newer it is, the bigger the impact.

Unlike other collection accounts, an unpaid tax lien may stay on your credit report for an indefinite amount of time. Even after it has been paid, a tax lien can stay on your credit history for seven years. Having a tax lien on your credit report can prevent you from getting new credit, such as credit cards or loans.

Federal Tax Liens vs. State Tax Liens

In many ways, federal and state tax liens are similar. Both of them result from unpaid taxes, and both can be reported on your credit report. However, there is one major difference between the two.

The IRS created the Fresh Start Program, which allows the tax lien to be removed once it is paid, prior to the seven years. But this tactic only works if the taxpayer requests for it to be removed. Individual states do not have similar programs that allow the lien to be removed early.

This does not mean it cannot be removed, but it is up to the credit agency rather than a specific program. With the federal program, the person may even be able to have the lien taken off their report if they’ve entered into a payment arrangement and made at least three payments.

How to Get a Tax Lien Removed from Your Credit Report

To get a tax lien removed, you may have to pay your taxes in full or have an agreement in place. Talk to the government agency about payment and work with them to create a payment plan you can afford before you attempt to have the lien removed.

The next step is to request a credit report to find out if the lien has been reported. This also tells you the amount you owe to ensure you pay it in full. You can request a report from the reporting agency or from AnnualCreditReport.com.

Once you enter into an agreement to pay your tax bill, get the details in writing. This helps to protect you from further action as long as you meet the obligations outlined in the agreement.

For federal taxes, contact your local IRS office. Contact the state, county, or city website for other tax bills owed. Once you have paid off the tax debt, request a letter that states your taxes have been paid in full. This information will be important when you attempt to get the lien removed.

#1: File a Dispute with the Government

The Fresh Start Program from the IRS makes it easier to get a federal tax lien removed from your credit report. Once the tax debt has been paid, you’ll need to make sure you’ve complied with all filing and payments for the past three years. This is true whether you are filing as an individual or as a business.

If you want to enter the program while you’re still paying off your tax debt, you must owe no more than $25,000 and be current on your installment agreement. You must have made at least three payments and have not defaulted on any prior agreements.

Once you’ve paid off the owed taxes or have been given a waiver because the amount is under a certain threshold, you’ll receive Form 668Z — a Release of Federal Tax Lien. This means that your property is no longer under a lien.

You’ll also need your original notice of lien. Fill out the Form 12277 from the IRS, which is an Application for Withdrawal of Filed Form 668Y. Then send all three of these documents to the IRS along with a letter or statement explaining why you want the lien to be removed.

For federal tax liens, you should receive a notice, the IRS Form 10916c, which is the Withdrawal of Filed Notice of Federal Tax Lien. This tells you that the tax lien has been removed from your credit report.

For state liens, you’ll need to contact the tax office for your state and ask for a form that verifies the lien has been released once it has been paid. When it’s finally released, it means the government no longer has any claim to your asset.

#2: Write a Dispute Letter to the Credit Bureaus

Even if the government agency has agreed to withdraw the lien, it doesn’t mean it will automatically get removed from your credit report. Old information commonly stays on credit reports until you formally dispute it.

The best way to dispute a tax lien with the credit agencies is by mailing a letter. You’ll need to show proof that the lien has been paid, such as a copy of the lien release. Send the letter certified so you have a record of it being received.

When you submit the letter, include a copy of your credit report with the tax lien highlighted. You’ll also need to include the release for the lien. TransUnion has a form you can use in place of a letter, which you can just fill out and drop in the mail.

What to Include in Your Dispute Letter

When writing the dispute letter to the credit bureaus, you’ll need to include all of the essential information.

  • Name of creditor or agency that filed the lien
  • Type of item – tax lien
  • Date the lien began

State that the agency has withdrawn the tax lien and that you have a withdrawal notice. Request that it be removed from your credit report. Include a list of documents you are attaching with the letter and a description of what they are.

Ask for an investigation and for deletion of the disputed item. You’ll need to submit a letter like this for each credit bureau where the tax lien is reported. In some cases, it will be reported to all three of the major agencies, while in other instances, it may only be reported to one or two.

Be sure to make copies of all documentation, including the letter, and never send originals. Then send one copy to the agency via certified mail.

The Waiting Game

Expect it to take around 30 days to hear a reply from the credit bureau regarding your letter. This reply will probably just be an acknowledgement of your letter and request. It will probably state that an investigation will be conducted regarding your request.

You should expect another 90 days before you hear a decision. If you receive a denial, you’ll want to find out the reason why. It may be because an important document was missing or there are questions that were not answered. If the agency has provided a notice of withdrawal, you should be able to get the item removed as long as you submit all of the necessary information for the investigation.

Once the tax lien has been removed, expect to see an increase in your credit score. You should also be able to qualify for loans and credit accounts where you were denied before because of the tax lien. This process is a lengthy and complicated one, but it is well worth the effort, especially if you want to buy a house or apply for other credit.

How to Prevent a Tax Lien from Being Added to Your Credit Report

A tax lien is an item you don’t want to see added to your credit history because it can quickly hinder you from reaching your financial goals. Getting it removed is difficult and often does not happen.

The best way to prevent the repercussions of a tax lien is to avoid having one filed in the first place. To avoid having a tax lien filed against you, pay the taxes you owe. If you cannot pay them, make arrangements for a payment plan. The IRS and many state agencies are willing to work with you to avoid having to take such drastic steps.

Don’t ignore any notices you receive about taxes due. If you communicate with the agency, you may find a workable solution that protects your credit rating.

Moving Forward

Filing a tax lien is a serious step for the government or any other agency or company to take against you. It can have serious repercussions for you now and in the future. However, it doesn’t mean you can never qualify for credit again.

Worst case scenario, once you have paid off the tax debt, you may have to wait seven years for the information to be removed from your credit report. But you may also be able to get it removed sooner if you follow the right process.

The best way to prevent the problems that come with a tax lien is to avoid having one filed. Communicate with the agency about your inability to pay off the debt and attempt to make arrangements that will protect your credit rating. Once a tax lien has been filed and reported to one or more credit bureaus, it’s still not too late to fix the situation.

If you don’t want to worry about communicating with the IRS, reach out to work with a professional credit repair company.