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How to Make Your Tax Lien Disappear

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A tax lien can be one of the worst items to appear on your credit report. It’s considered very negative and can cause your credit scores to drop significantly. Even worse, under federal law, unpaid tax liens can remain on credit reports indefinitely, though in practice credit bureaus may remove them after a decade or so. (Once paid and released, a tax lien must be removed seven years from the date it was filed.)

There is a way to make tax liens disappear from your credit reports completely, and quickly, though. Unfortunately, not all taxpayers who are dealing with this problem know about it.

A Notice of Federal Tax Lien — “NFTL” in IRS parlance and just “tax lien” to the rest of us — is a tool the IRS uses to let creditors and others know that it has an interest in your property because of tax debt you still owe. If you can’t pay your taxes, the IRS may file one of these (it’s automatic when the amount owed is $10,000 or more). When it does, it is typically picked up and reported by the major credit reporting agencies. Credit scoring models consider tax liens very negative, and they can have an effect on credit scores similar to bankruptcy or judgments.

The Taxpayer Advocate noted in its report to Congress that as of March 2013, the IRS had filed 307,842 NFTLs. (Figures reported are for the fiscal year.) While that’s a decline of 50% over the same period in 2011, it’s still a lot of people who have been affected. And, of course, the cumulative number of people with this problem is much higher.

What many people don’t know is that in 2011 and 2012, the IRS implemented something called the “Fresh Start” initiative, which 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One of the changes includes a policy that allows certain taxpayers to request that their tax liens be withdrawn, even before the underlying tax debt has been paid. Under this policy, a taxpayer can request the tax lien be withdrawn in certain circumstances that we’ll describe in a moment.

The Taxpayer Advocate reports that as of March 2013, the IRS issued 6,845 lien withdrawals, an increase of 18% over the same period in 2012. While that’s great news for the nearly 7,000 people who managed to get these taken care of, there are still far more who may qualify but aren’t aware of the program or don’t know how to take advantage of it.

I’ve seen firsthand how unaware people are of this policy. Not long ago, I reviewed the credit report of a friend who had two tax liens on his credit reports. Though he had paid them off a couple years prior, he had no idea he could request they be removed from his reports. Using the instructions in this article, he was successful in getting them off his reports.

Do you have a tax lien on your credit reports? 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 (you’ve paid what you owe) and your lien has been released;
  • You are in compliance for the past three years in filing your individual and business returns, and information returns (as applicable) and;
  • You are current on your estimated tax payments and federal tax deposits, as applicable.

Even if you haven’t paid the IRS what you owe, you may be able to qualify for this program if you currently owe $25,000 or less and have entered into a direct debit installment agreement where your payments to the IRS are taken from your bank account automatically. There are other requirements you’ll need to meet, including that you have made at least three direct debit installment payments successfully and that you have not 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 for Withdrawal. It’s a fairly simple one-page form, with one page of instructions. Complete it and send it to the IRS per their instructions. If the IRS approves your request, it says it “will file Form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien, in the recording office where the original NFTL was filed and provide you a copy of the document for your records.” This means you will have a written record that the lien has been withdrawn.

You can ask the IRS to then notify the credit reporting agencies of the withdrawal, or you can supply that notice to them yourself. Once the credit reporting agencies process your request, the lien will be withdrawn and your credit report and scores will treat it as if it never existed.

Note that this is not a process you need to pay a credit repair firm to do on your behalf; it’s something you can handle on your own. If you normally work with a tax professional, you may ask them to help, but even that may not be necessary in most situations.

Will It Help My Credit Scores?

Getting a negative item like this one removed from your credit reports will often help your credit scores. But how much will your credit scores change when the tax lien is withdrawn? It depends on a number of factors, including how old the lien is and what other type of information is in your reports. For that reason, it would be smart to review your credit score before the lien is removed and then continue to monitor it after the fact. You can do this for free using Credit.com’s Credit Report Card.

Some consumers have complained that getting negative items off their credit didn’t help their scores. 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 credit. Still, the fact that there are no liens reported can be helpful when applying for another loan such as a mortgage.

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  • Ann

    I went through the process and have a signed 10916 form (the lien was paid over 6 years ago). I have sent it to all 3 of the credit reporting agencies and Transunion responded as ‘release of tax lien verified, no change’. They don’t seem to be recognizing that this allows it to be withdrawn. Do you have any advice for me? Thanks

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

      Hmmm…can you get a copy of your TransUnion report to see if it has been removed? Or you can try calling them if you already have a copy of your report. If they still haven’t removed it I would suggest you file a complaint with the Consumer Financial Protection Bureau.

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

    You will need to check with your state taxing authority to see if there a similar program. Even if there is not you still should make sure that the release of lien (or whatever it is called in your state) has been filed so that it shows as paid on your credit reports. That way the state liens can’t be reported for more than 7 years from the date they were entered by the court.

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

    That’s fabulous! Thank you for sharing this. Do monitor your credit scores – you will probably see improvement. Here’s how to get your free credit score.

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

    If you qualify, you can request the lien be removed immediately if you qualify. If you don’t, then it sounds like it will come off your reports on 12/17. Reaching an offer in compromise shouldn’t extend the reporting period.

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

    You’ll need to talk with a local real estate attorney to clear this up. Perhaps there is a mistake.

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

    Unpaid tax liens may be reported indefinitely. In terms of your comments about the qualifications, filing your taxes for the last three years is not the only requirement. You must be making payments or have resolved the debt. I’d suggest you read the instructions for Form 12277 and talk with a tax professional about your options for resolving this tax lien.

  • Renard Pongrac

    I have a question and am hoping someone can help and assist me and it would be much appreciated. First of all I was an actual victim of identity theft and I was taken to the cleaners for almost everything. I had learned that there are 3 federal tax liens on my credit reports and I have disputed these multiple times with all the credit bureaus however they refuse to remove them from my credit files. I sent them all the official documentation regarding the police reports and all the other legal stuff as well, but again will not take them off. The thing here is these 3 federal tax liens are equally to over one million dollars and I never have earned that amount of salary or money in my entire life. The rest of my credit is good and my bills, credit cards, auto loans are all paid on time each and every time every month, but with these 3 federal tax liens on my credit reports I can not get my credit score above 600 and any time I need or want any financing the bank wants 40-50% down before they will approve it. Again, if anyone here can assist or help me out here with this it would be deeply appreciated and thank you for taking the time to read my current issues and problems I am having with my credit. Regards and thank you.

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

      Have you talked with a consumer law attorney? You may have a case for credit damage and may be entitled to damages as a result. You can look for a consumer law attorney with experience in FCRA issues at the website of the National Association of Consumer Advocates website.

  • jc

    Hi, although I received notice of WITHDRAWAL TAX LIEN Form 10916 (c) from IRS April 2011, the Liens continue to show on my credit report. This is killing my credit. I have contacted IRS and requested help, as well as Manhattan, Office of Register. I was advised the Liens should have dropped off anyway (date back to 2000-2001). And yet, there they are, staring me and potential creditors in the face. It does no good to show the WITHDRAWAL FORMS to “potential creditors”, I have tried. I desperately NEED a car. Please, can someone help?

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

      jc – Did you dispute these liens on your credit reports directly with the credit reporting agencies and supply the copies of these letters? If you did and they were not removed then I’d suggest you either file a complaint with the CFPB or talk with a consumer law attorney as you may have a case for credit damage.

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