A Tax Lien Can Destroy Business Owner's Credit - Are They Fair?
A few years ago, a colleague confided in me about his tax lien problem. When his computer business failed, he found himself owing the IRS around $15,000. He promptly set up a payment plan and began faithfully making payments. He was shocked, then, when the IRS filed a tax lien on his property. The tax lien showed up on his credit reports, and his credit scores plummeted, making it virtually impossible to borrow, much less get a new business off the ground. “I am making payments as agreed,” he protested. “Why do they need to file a lien?”
Tax liens are a vexing problem for both individuals and small business owners. On personal credit reports, they remain on credit reports longer than any other type of negative information and fall into the same category as bankruptcy, foreclosure or repossession. Tax liens drop credit scores by an average of 100 points, according to VantageScore. Business credit reports will also list tax liens filed against businesses, and that lien can be a deal-breaker for a company looking for a business loan.
Recently, the Taxpayer Advocate released its report on the most serious problems facing taxpayers today, and near the top of the list was the IRS’ policy on filing tax liens. (The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving problems with the IRS, or who believe that an IRS system or procedure is not working as it should. They report annually to Congress on the top problems taxpayers face.)
Here’s how a tax lien works: If the IRS determines there is a tax liability, they will send you a notice that the tax has been assessed, and you have just ten days (!) to pay it in full. If you do not, a Federal Tax Lien (FTL) is created. It attaches to all of the taxpayer’s property, real or personal. If you owe over $5000, the IRS will typically file a Notice of Federal Tax Lien (NFTL) which is designed to let other creditors know the that IRS has dibs on your property. The NTFL will be picked up and reported the credit reporting agencies.
After you have paid or resolved the tax lien, you can request documentation from the IRS that the tax lien has been satisfied, inform the credit reporting agencies of that fact, and they will update the reports to show the tax lien has been released. But it still can remain on your credit reports seven years from the date satisfied and still hurt your credit during that time.
While the IRS is able to withdraw a tax lien in certain circumstances, the report indicates that IRS officials are very reluctant to do so unless the IRS clearly made a mistake. (If there is a withdrawal, the item is removed completely from the credit reports.) This is an example of illogical government bureacracy at its worst. Think about it: wouldn’t the fact that the lien will be taken off your credit reports if you resolve it be an incentive to pay as quickly as possible? It’s a no brainer.
In the report, Nina E. Olsen, the National Taxpayer Advocate, makes some excellent commonsense suggestions for improving how the IRS handles tax liens, including more discretion for IRS employees to avoid filing an NFTL in cases where the taxpayer doesn't have the ability to pay, and abandoning the policy of automatically filing NFTE's without a thorough investigation of the taxpayer's circumstances first. If you’ve been hurt by IRS policies regarding tax liens, I’d like to hear your thoughts on this issue.
Gerri Detweiler’s mission is to provide reliable, unbiased answers to your credit questions. She is the co-author of Business Credit Success: Get on the Financing Fast Track and serves as Personal Finance Advisor for Credit.com.
