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How Removing A Tax Lien Affects Your Credit

Comments 45 Comments

We received two questions about tax liens recently, and it give me the opportunity to check in and see how the IRS’s initiative to give taxpayers a “fresh start” after they’ve paid off tax liens is working.

My credit scores are 730, 723 and 728 but I have a tax lien filed against me. If I can get this removed how many points will this bring up my score? I apply for car loans but keep getting rejected because of my credit report. I recently had to sell my truck because I could not get the truck inspected, thus I have no vehicle. I am currently using my ex-wife’s mom’s car to get to work, but I’ve been given a deadline on this favor from her.  Please help me  — Mike

Mike, we can’t predict exactly how much your scores will rise if this tax lien is removed. That will depend on how old the lien is, as well as what other types of negative and positive information are listed on your credit reports. As you already know, though, tax liens are considered very negative, so getting it removed would be a good idea. (Don’t ignore other factors that may be hurting your credit scores. Credit.com’s free Credit Report Card can help you understand additional factors that may be impacting your scores and making it difficult for you to get financing for a new vehicle.)

[Related article: Rebuilding Credit in a Hurry - Is It Possible?]

So how do you get a tax lien removed from your credit reports? Until recently, tax liens remained on credit reports for seven years from the date they were paid or satisfied. But under the IRS Fresh Start program announced in early 2011, you can request that the IRS withdraw the lien if you have paid or satisfied the tax debt. This is not something that happens automatically. You must ask.

The last time I wrote about that program it was brand new. Your question gave me the opportunity to find out how this program is actually working. The IRS sent me to this webpage for more information about the program, but would not supply any more details.  According to the instructions, taxpayers must fill out Form 12277 requesting that the lien be withdrawn. If it is withdrawn, the IRS will file the notice of withdrawal with the office where it was recorded and send you a copy. You can also request, in writing, that the IRS notify credit reporting agencies, creditors or financial institutions. It’s up to you to provide the addresses for those parties you want notified of the withdrawal.

[Resource: Get your free Credit Report Card]

How easy hard is it to get a tax lien removed?

Scott Estill, a former senior trial attorney and author of Tax This! An Insider’s Guide to Standing Up to the IRS warns that “anyone trying this must remain very patient and diligent in their efforts as it will take a bit of time (i.e., more than one phone call!) and there will be some resistance as getting many IRS employees to do more paperwork can be a challenge.”

Karla Dennis, a Licensed Enrolled Agent with Cohesive Tax, told me that her firm has worked with two clients who paid off tax liens in 2011 and requested that those liens be removed from their credit reports.  “In both cases, the lien was removed, but it was not easy by any means,” she says.  “IRS means well with this approach but the practicality of it is still extremely time-consuming.” One of her firm’s clients was trying to get the lien removed in order to close on a mortgage loan. “We started this process in May and did not get the lien removed until late August.  It took over 90 days for this to happen.”

I asked Dennis whether the client’s credit reports were updated automatically or whether they had to dispute their credit reports after the IRS removed the lien. “There is not an outlined protocol,” she responded.  ”We did both.  We disputed it through the credit bureau as any dispute has to be removed until reviewed.  But, we also requested it be removed through IRS lien desk notification system.  In the end, the credit bureaus removed and IRS verified it was correct to stay off of the reports.”

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Next question: Must a withdrawn lien be disclosed on future applications? »

Image: Raquel Baranow, via Flickr.com

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  • Elly

    Thanks! I found that form and will submit it to see how the process works. I will update you!

    • http://www.Credit.com Gerri

      Please do!

  • tresa

    Does the same apply for a state tax lien?

    • Gerri Detweiler

      No. Form 12277 only applies to federal taxes. You’ll have to check with your state taxing authority to find out whether similar rules apply.

  • Todd

    I filed my request in January and received my Form 109116(c) Withdrawal of Filed Notice of Federal Tax Lien today. My unpaid tax was from 2004, I paid installments and completed them in 2008. The tax debt was ~$6,000. I called the IRS 30 days after mailing my forms and they had lost my paperwork so I faxed a new copy and they acted quickly after that.

    • Todd

      Follow up. I received my lien withdrawal on April 7th, 2012 as noted above. Although the IRS sent copies to the reporting agencies (because I requested it), I followed up with copies of my own. Trans Union removed the tax lien immediately. A follow up call and dispute, and after 45 days, Experian removed it from my credit report (even though the paperwork they sent me about my dispute said that the item remained unchanged (I didn’t ask questions, it’s gone)). Equifax was the most difficult. I had to dispute the same item 4 times over a 3 month period. Each time the dispute would be rejected because the credit agency would send a request to the recorders office to determine if the lien is actually filed. Of course when you get a lien withdrawal filed with the recorders office, they don’t actually withdrawl the lien from the file, they simply file the withdrawal with the existing lien. As a result, the recorders office kept verifying that a lien had been filed (which was true). Unfortunately, they did mention that a withdraw was filed with it. They simply acknowledged the lien was in the file as requested. After many phone conversations and being super persistent, as well as faxing the lien withdrawal directly to the dispute department, I finally got the last one off last week. Just be patient and stay on top of your credit reports to see where you need to focus you efforts.

      • http://www.Credit.com Gerri

        Todd-

        This is extremely helpful. Thanks so much for following up and telling us how this process actually worked for you. I have no doubt this will be helpful to others.

        Gerri

  • wayne

    form 12277, includes a space, section 12 to Explain the basis for the withdrawal request.

    Is it better to list things like, increased loan rates, reluctance of employers to hire?

    are there other good reason to list that will sway the IRS? and are there things NOT to list that it will dissuade the IRS.

    thanks

    wlg

    • Gerri Detweiler

      Wayne – Why are you requesting the lien be released? Which box are you checking in section 11?

    • Todd

      Simply put “in the interest of justice” and they will remove it if you qualify. I had no issues. The IRS employees that review these cases are not judges. If you qualify, you will get your lien removed.

  • cheryl mckelvey

    i have converted my payment plan with the irs to a direct debit and have paid my monthly payment for three consecutive months. I filed a form 12277 immediately after seeing the direct debit on my account. How long does it take to get the withdrawl of tax lien from the time you send the form?

    • Gerri Detweiler

      Cheryl,

      The IRS isn’t saying so your guess is as good as ours. Will you let us know when you do get it released? It will be helpful to other readers to know how the process works.

      • peg

        Yes please update on this one as it is of much interest to us – we have an IA and set it up on direct debit from the start, this was near 3 years ago so have made the monthly payments for that long, so if reading this and other infos correctly, we should be able to have the withdrawal done which would help in getting either a refinance or mortgage mod because that in itself is an issue as BOA insists they are not able to verify a lien (they want all the info on one piece of paper in order to accept that they can verify it – lien number/pmt does go towards lien/monthly pmt amt – they got this info but not on one letterhead (on 3 yes) and IRS doesn’t do what BOA wants so its been a nightmare and they denied a mod on this basis)

    • peg

      I am seeing it as this on the form and think the only way it can be released in our situation is if the installment agreement did not stipulate that a lien would be filed – not sure if Cheryl’s did and the one of direct debit is merely indented as a sub-item under this and I tend to think it was not a mistake on the form (ie should be further left on this form directly under the rest of choices) nor be a separate item for which a withdrawal can be made.

      [ ] The taxpayer entered into an installment agreement to satisfy the liability for which the lien was imposed and the agreement did not provide for a Notice of Federal Tax Lien to be filed.
      [ ] The taxpayer is under a Direct Debit Installment Agreement.

  • Janet

    I had two tax liens filed in 2009 however I paid both in full and this was released. This is with the State of GA. Even though paid in full, it is still on my credit report as negative. Equifax said I need to call the court where it is filed to get the verbage itself removed even though is shows paid in full. It is showing up as dergatory public records. How can I get this off entirely so it does not state this.

    • Michael Schreiber

      Janet – we’d like to try to move this discussion over to our user community. Could you post this over there? You’ll benefit from the perspective of members of the community, as well as Credit.com experts… I was thinking this question should probably go in the credit report/scores section here: http://forum.credit.com/t5/Credit-Reports-Credit-Scores/bd-p/ReportsScores
      Thanks,
      Mike

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  • Dennis

    WARNING!! WARNING!! WARNING!! WARNING!! WARNING!! WARNING!!

    Having a tax lien “RELEASED” has absolutely no effect on your credit score. It only shows creditors that the lien has been released. The only way to improve your credit score is to have the lien “WITHDRAWN”.

    BUT WATCH OUT, THE IRS IS TRICKY AND CAN PULL A FAST ONE ON YOU!!!

    I recently filed Form 12277 and it was denied. When I called up to find out why, the IRS told me they would only “withdraw” the tax lien once I paid the balance in full and resubmitted Form 12277. So, I asked what the bottom line was and they responded with a figure just over $10,000.00.

    I could have waited a couple more years for the 10-year statute of limitations and the tax lien/debt would have gone away on its own, but I wanted to clear my credit report. So I borrowed $10,000.00 from a friend, got a cashier’s check, went directly to the local IRS office, paid the full amount they quoted me, and resubmitted Form 12277.

    They DENIED my request again.

    I was outraged that they had denied me after I paid over $10,000.00 with the good faith belief they would withdraw the tax lien. When I contacted them and asked why they failed to honor their promise to withdraw the tax lien, they told me $4,000.00 had been discharged in bankruptcy court a few years earlier. Even though that amount had been discharged, they said I would need to pay the additional $4,000.00 ALSO to get the lien withdrawn.

    So, as far as they were concerned, I owed $14,000.00 and not $10,000.00, and they deliberately failed to tell me that because they saw an opportunity to collect $10,000.00. They obviously knew that I knew $4,000.00 had been discharged in bankruptcy, so they didn’t mention it because that may have prevented me from paying anything at all.

    So here is what you need to do BEFORE you file a Form 12277 if you had taxes discharged in bankruptcy:

    Contact your local IRS Advisory Group Agent and explain you are willing to pay your tax debt in full, but only if they agree to waive any discharged amounts that were discharged through bankruptcy; and, that they agree to WITHDRAW (not just RELEASE) the tax lien.

    Remember, having a tax lien RELEASED only lets creditors know the lien is released, which does not raise your credit score. The only way to RAISE your credit score is to have the lien WITHDRAWN. So, be sure there aren’t any loopholes (such as bankruptcy) that may give the IRS a chance to pull a “bait and switch” on you.

    GOOD LUCK!!

    • Gerri Detweiler

      Wow Dennis. What a story! I question the ability of the IRS to pressure you to pay a debt that was discharged in bankruptcy in order to have the lien released. That just doesn’t sound right to me. If a creditor did that they’d be breaking the law. I understand this is the federal government, but still…? I’d suggest you contact the Taxpayer Advocate and see if there is something fishy going on here. I’d also suggest you talk with your bankruptcy attorney; it would be interesting to hear his or her take on this.

      • Dennis

        I did contact the Taxpayer Advocate. The person I spoke to was as useless as boobies on a boar. However, when I said I was gonna file a “Federal Lawsuit”, they quickly changed their tone and gave me the withdrawal.

        • Gerri Detweiler

          My sense is it can be hit or miss with them – and I guess you had a miss. Glad you were able to get it removed but I still wonder if what they did was legal.

  • Denise

    I didn’t realize that you can request to have the tax lien removed from your credit! Does this apply to state taxes as well? My situation is my husband and I owed approx $3000 to the state of Alabama in 2004. We made the payments as advised and the lien was released in 2007. I was just waiting for the 7-10 years to pass. Can we request for this to be withdrawn from our credit? I guess I don’t understand how they could have placed a lien on our property in the beginning. We arranged for the payments, made each payment on time and paid it off early. Please HELP!!

    • http://www.credit.com Gerri

      Denise –

      This is a federal program that applies to federal tax debts. You’ll have to find out if your state has a similar program. If not, you may want to let your state officials know that you would support a similar program for state tax debt. They may like that idea – it may help them collect state tax debt faster!

  • Ashley

    What about State Tax Liens?

    • Gerri Detweiler

      Ashley – This program only applies to federal tax liens. You’ll need to check with your state taxing authority to find out what their policy is. Under federal law, they can report tax liens for seven years from the date they are paid or satisfied, and indefinitely if they remain unpaid. Will you let us know what you find out?

    • Clarabelle12

      Depends on your state and the cirumstances. Sometimes you can appeal for an expungement.

  • kevin

    My credit is a disaster !
    In 2011 my bankruptcy was discharged, so in April I’m coming up on 24 months post BK, yet my credit won’t repair ..due to this fed tax lien. I’ve owed them 10 k for a few years now, though I’m on the payment plan(monthly) I’m definitely paying this in full by august, then begging for a release-withdrawl-surrender, however they word it. I really want to buy my first house next year,…..but I need to build my credit score fast, by then I’ll be 36 months out from bk discharge. For the record, I just completed a small $ 1000 secured loan with my credit union…..12 months good! I was told that my score wouldn’t budge due to the tax lien. Can I get a fha mortgage ,with a paid in full tax lien on my cedit report? A bankruptcy is bad enough, however that weakens as the years roll on,……but the tax lien hurts too. UGH ! will my life ever get better?

  • Marie

    We recently paid off our federal tax lien and I have recieved Form 668 (Z) (Certificate of Release of Federal Tax Lien.

    So who do I call to try and get it off my credit report? The IRS or credit bureaus?

    • Gerri Detweiler

      Marie – Congrats on paying that lien off! The next step is to get your credit reports from all three agencies. Then once you see which CRAs are reporting it, you ask the IRS to notify them. The IRS says this in the instructions for Form 12277: At your request, we will notify other interested parties of the withdrawal notice. Your request must be in writing and provide the names and addresses of the credit reporting agencies, financial institutions, and/or creditors that you want notified.

      While you can get your reports free at AnnualCreditReport.com in this case you may want to spring for credit monitoring for a few months so you can keep tabs on the changes on your reports. Let us know how this goes!

  • Dennis

    Had my lien removed immediately in 2011. Had zero problems doing it. I sent the forms to the taxpayer advocate folks and they handled it for me. It was new to them.

    It was a simple process. The IRS sent me many copies to send to my credit agencies and such. I also went to my local court house to get it marked as withdrawn on my local records as well. Process took about a month or so.

    Just HANG onto the copies for life. Never know when you will need them!

    When I got my Tax lien back in 2005 it was because I didn’t file my taxes. I did my taxes and ended up getting all the money back from the IRS+interest so I hated it being on my report.

    • Gerri Detweiler

      Congrats! What a great story – glad you shared it.

  • Pingback: IRS Eases Up on Tax Liens: Good News for Credit Scores | Credit.com News + Advice

  • Jocelyn

    Part I–For those of you who actually got the liens released, withdrawn, and removed from your credit, how much did your credit score increase? I too am trying to purchase a home and was told that I won’t even qualify for an FHA loan if I have an active tax lien.

    Part II–I have a tax lien it was originally for 2002, 2003, and 2004. The balance remaining is a portion of 2004. In addition to the tax lien, I also have a balance for 2007 (10k). Will I be able to pay off the tax lien, then set up an installment agreement for 2007 without getting another tax lien for the 2007 balance?

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  • http://www.Credit.com/ Gerri Detweiler

    Very interesting Mike. Was the late car payment very recent?

  • Dennis

    We currently have a federal lien on our credit, although we were told at the time that it should not had filed; whatever. My question is if we would qualify. 1st,our lien came about by my wife taking a large sum of money out of her 401for an emergency (once in 2011 & once in 2012) and not enough taxes being substracted, We have been on a payment plan which is automatically withdrawn from our checking. I had to request a reduced payments due to hardship. I am hiring our accountant to go through the process of a compromised payment. Are we qualified to request and win a withdrawal of lien now or should we wait until after the compromised settlement ,Thanks

  • http://www.Credit.com/ Gerri Detweiler

    It doesn’t hurt to try. Fill out Form 12277 and see what happens. Let us know!

  • http://www.Credit.com/ Gerri Detweiler

    I am so sorry to hear that. You may want to share your story with your elected officials in your state legislatures. An increasing number of states are passing laws restricting the use of credit checks for employment purposes.

  • Clarabelle12

    My experience with this is that a tax lien on a property I owned plummeted my score 55 points. If you have licenses in the state, in can adversely affect that license. Mine was that I got faulty tax advice and didn’t file in SC after I relocated. I had a stock sale and SC wanted its piece of it. After I paid it (expediantly upon notice), I asked for an expungement. You might have to work your case, but it could be granted. Mine was and it raised the FICO to the previous level.

    • http://www.Credit.com/ Gerri Detweiler

      Thanks for sharing that story. So glad to hear they were willing to work with you.

  • Lisa Maringer

    Is there a way to get a State Tax Judgement off my credit reports? I had a house fire and was displaced. I did not receive anything that I was being taken to court. When I realized I had forgotten that it was owed, I paid it immediately! I’m trying to get financed to buy a home and not able to because of this judgement. Can you help?

    • http://www.Credit.com/ Gerri Detweiler

      Lisa – That is a tough one. Who filed the judgment? Have you talked to them about this situation? When did it occur? Have you talked with your loan officer about whether you can get approved for the loan if you satisfy the judgment?

      • Lisa Maringer

        I’ve already paid the lien/ judgment. Just a few months after it was placed on my credit report it seems. The state tax office filed it, it looks like. It happened in July of 2012 the same month my house fire happened

        • http://www.Credit.com/ Gerri Detweiler

          It can likely only be removed by the party that filed it. (You are asking them to withdraw or expunge it.) They may have procedures for requesting this, but if they won’t cooperate, I’d suggest you try getting your state representative or local news media involved.

  • http://www.Credit.com/ Gerri Detweiler

    Terry – That may be the state policy. The IRS, for example, used to automatically file a lien when the balance was over $5000 (they have since raised the threshold). Your next question should be whether paying it will remove it from your credit. Tax liens may be reported for 7 years from the date they were filed, if they have been satisfied. If this an older lien then paying it may get it off your credit. If not, then ask the representative if it is their policy to file a lien withdrawal once it has been paid. If that’s the case and you can come up with the funds to pay it you may be able to get it off your credit. (See the comment from Clarabelle12 below.)

  • Colin Bisson

    I recently paid a tax lien amount in full and it will be released in a few weeks once everything has been sent to the recording office. However, it is on the state level and not with the IRS. Will it still be possible to take advantage of the fresh start opportunity and have it removed from my report? Thanks!

    • http://www.Credit.com/ Gerri Detweiler

      Colin – It depends on how paid tax liens are handled in your state. Unfortunately I haven’t found a directory that lists this for all fifty states. You will have to contact your state taxing authority.

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