Do You Owe the IRS? Here’s How to Remove Tax Liens From Your Credit Report

Has your credit been damaged by a tax lien? Fortunately the damage doesn't last forever. There are ways to remove tax liens from your credit reports. Even better, it may be possible to get them removed even before you've paid your tax bill in full.   

Tax debts don’t normally appear on credit reports. But if you owe taxes and can't pay them right away, the IRS may file a Notice of Federal Tax Lien to let the world know it has dibs on your property. When that tax lien notation hits your credit reports, it can create a whole new set of problems. “It can be crippling and you should do everything you can to avoid it,” warns attorney Barbara Weltman, the author of J.K. Lasser's Small Business Taxes 2016.

A few years ago, I wrote a post for AllBusiness.com questioning whether tax liens are fair. The Taxpayer Advocate Service (an independent agency that helps taxpayers solve problems with the IRS) made a compelling argument that these liens could actually make it more difficult for an individual or business owner to repay his or her tax debt because these liens often lower credit scores by as much as 100 to 200 points--or even more, making it harder to qualify for loans that could be used to pay the taxes due.  

When it comes to credit reports, business tax liens  are generally filed against businesses and appear on business credit reports; tax liens against individuals appear on personal credit reports. Sole proprietors may find liens filed against them individually, and there are situations where the IRS can hold a business owner personally responsible for a tax debt incurred by the business.

I later wrote an update stating that the IRS had instituted new policies that raise the threshold for when a lien is usually filed, and offers the opportunity for taxpayers to get liens withdrawn, even as they repay their tax debt. Note that these policies apply to both individuals and businesses, which, when it comes to tax liens, are essentially “the same,” says Weltman. 

Remove Tax Liens From Your Credit

The IRS will generally file a tax lien when a taxpayer owes $10,000 or more and does not resolve the debt after being notified. Under the IRS Fresh Start program, individuals and businesses that owe $25,000 or less and enter into an installment agreement and have payments directly debited from their accounts may request the lien be withdrawn after they have made three direct debit installment payments.

If a tax lien has been filed against you, it may be released 30 days after the debt is paid. However, that does not automatically remove the lien from your credit reports. To do that, you will need to file IRS Form 12277 and request a withdrawal of the lien. Once it is withdrawn, you can provide that information to the credit reporting agencies and request it be removed from your credit reports.

Note that under the Fair Credit Reporting Act, which applies to personal credit reports (not business credit reports), unpaid tax liens can be reported indefinitely, while paid tax liens can be reported for seven years from the date they are satisfied.

If the IRS has filed a tax lien against you or your business, you’ll want to find a way to resolve it. Again, this can be devastating to your personal and/or business credit scores, depending on which bureaus have received the information. Talk with a tax professional, and explore your options. When it’s resolved, be sure to file IRS Form 12277 and be proactive about notifying the credit reporting agencies when it’s been withdrawn so you can remove the tax lien from your credit reports.

“As long as you keep talking to the IRS and work with the IRS you can usually find some accommodation,” says Weltman. And if you can’t? “If you are being threatened with a lien and the IRS won’t work with you, try the Taxpayer Advocate Service,” she recommends.