It’s a trick question, because as of April 2018, tax liens were all removed fromÂ credit reports.Â TheÂ bureaus took this step to protect the integrity of those reports. According to theÂ Consumer Financial Protection Bureau, manyÂ judgments and liens were being reported incorrectly. That caused errors toÂ credit reports not affiliated with the various debts in question.
But that doesn’t mean you shouldn’t worry about a tax lien. First, the policy could change at any time and tax liens could show up on the report again. Second, tax liens can give theÂ federal government the right to legally seize your assets in payment for your tax debt. Getting rid of the lien before that happens can save you a lot of stress and hassle.
What Is a Tax Lien?
A Notice ofÂ Federal Tax Lien is a tool the IRS uses to let creditors and others know that it has an interest in your property because of tax debt youÂ stillÂ owe. Specifically, it puts the IRS in line to receive any payment associated with your assets if they are sold or liquidated. If you sell a home, for example, the IRS can take any profit if it hasÂ filed a Notice ofÂ Federal Tax Lien.
If you can’tÂ pay your taxes, the IRS may file a lien. The IRS automatically files when the amount owed is $10,000 or more.
What Is the Fresh Start Initiative?
What many people don’t know is that in 2011 and 2012, the IRS implemented something called the Fresh Start initiative. This 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One of the changes includes a policy that allows certain taxpayers to request that their tax liens be withdrawn. They can do so even before the tax debt has been paid. Under this policy, aÂ taxpayer can request the tax lien be withdrawn in certain circumstances.
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You can qualify to request your lien be withdrawn if: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 because you’ve paid whatÂ youÂ owe
- Youâve been filing your individual and business returns for the past three years
- You are current on yourÂ estimated tax payments andÂ federal tax deposits
Even if you haven’t paid the IRS whatÂ youÂ owe, you may be able to qualify for this program. You mustÂ owe$25,000 or less. You must also have entered into aÂ direct debit installment agreement where yourÂ payments to the IRS are taken from your bank account automatically.
There are other requirements you’ll need to meet. You must have made at least threeÂ direct debit installmentÂ payments successfully. You must also not have defaulted on a previous installment agreement. The IRS has the full list of qualifications.
2. Apply to Have the Lien Withdrawn
If you believe you qualify, fill out IRS Form 12277, Application forÂ Withdrawal. It’s a one-page form that comes with one page of instructions. Complete it and send it to the IRS per the instructions.
If the IRS approves your request, it says it “will file Form 10916(c),Â Withdrawal ofÂ Filed Notice ofÂ Federal Tax Lien, in the recording office where the original NFTL wasÂ filed.” It will also provide you a copy of the document for yourÂ records. This means you will have a written record that the lien has been withdrawn.
Will It Help MyÂ Credit Score?
Because tax liens are no longer reported on yourÂ credit history, getting one withdrawn won’t help yourÂ credit score directly. However, the fact that you resolved such a major debt and can move on with yourÂ financial life may impact yourÂ credit score. After all, you’re now free to worry less about those back taxes, so you might be able to make more timelyÂ payments on other debts.
In some cases, however, resolving a tax lien could bring your score down a bit. This could occur if you take out a new debt toÂ pay off the taxes. YourÂ credit score could temporarily drop because you’ve increased your debt utilization ratio. It might also have dropped because of the hard pulls on yourÂ credit history that occurred when you applied for the loans.
It’s a good idea to understand what’s going on with yourÂ credit score no matter what your tax situation is. You canÂ check your credit score free using Credit.com’s Credit Report Card.
Some consumers have complained that getting negative items off theirÂ credit score didn’t really help. When that happens, it’s often because the information that was removed was very old or they haven’t been able to establish positive credit references to rebuild yourÂ credit score. Still, the fact that there are no liens reported can be helpful when applying for anotherÂ loan such as a mortgage.
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