Do You Have a Tax Lien? There May Be Good News on the Horizon

Do You Have a Tax Lien? There May Be Good News on the Horizon

Do You Have a Tax Lien? There May Be Good News on the Horizon

For those stressed out because they owe tax debt, there’s some good news on the horizon. As we approach the individual tax filing deadline four 2018, the major credit bureaus are in the process of removing an estimated 5.5 million tax liens from consumer credit reports. This could result in higher credit scores for those consumers.

Tax liens are notices filed with the courts by state taxing authorities or by the IRS when an individual owes delinquent taxes. They indicate a legal claim by a local, state or federal government agency against the taxpayers assets. The procedure for filing a tax lien varies by state, however, they are considered significantly negative on credit reports and can contribute to low credit scores.

The removal of tax liens from credit reports is part of an agreement by the credit bureaus and 31 state attorneys general to improve the accuracy of information in consumer credit reports. Most civil judgements and about half of all tax liens have already been removed as a part of this agreement, and the remaining ones should disappear by mid-2018 at the latest.

Pro tip: What you don’t know can kill your business

Pro tip: What you don’t know can kill your business

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Prior to this change, some consumers were able to get tax liens removed by entering into payment arrangements or by satisfying the tax debt and requesting removal of the lien from their credit reports. However, procedures varied widely by state, and some states did not offer this kind of relief. Under federal law, tax liens could remain on credit reports for seven years after they were satisfied.

Credit Score Boost?

How much will consumer credit scores rise after these items are removed? It depends. There are many different credit scoring models and each may weight this information a little differently. In addition, the CFPB reports that many consumers with tax liens on their credit reports also have other types of negative information on those reports that could bring down their credit scores.

The majority of consumers who already had tax liens or judements removed in their credit reports saw credit score increases of 0 to 15 points, according to the CFPB analysis. However, individual consumers may see larger increases depending on the other information in their credit reports. The CFPB report also found that about 6% of consumers who had judgments or liens removed from their credit reports after the first wave of removals moved from deep subprime or subprime to the near prime credit category. Essentially that means they became more creditworthy and were less likely to be declined for credit and more likely to be able to borrow at better interest rates than before.

Caveats

There are a few things that  those with outstanding tax liens need to understand:

  1. This action does not affect business tax liens, which can appear on business credit reports and bring down business credit scores. Only consumer credit reports will be affected.
  2. Business owners may see a greater impact, however. Nav’s research, for example, found that 17.5% of small business owners with a Nav account have either a civil judgment or a tax lien on their personal credit report.
  3. While the tax lien may be removed from the credit report, that doesn’t mean the debt is erased. Often, taxing authorities have a great deal of power when it comes to collecting debts. They may be able to garnish wages or even seize assets, for example. So it’s still important for someone who has  an outstanding tax debt to talk to a tax professional and find a way to resolve it.

What Next?

If you currently have a tax lien on your credit reports, you’ll want to monitor those reports and your credit scores so you can see how they change after that information is removed.  Consumers are entitled to one free credit report per year from each of the major credit reporting agencies at AnnualCreditReport.com. In addition, there are over 150 places consumers can monitor their credit scores for free. That includes Nav, where small business owners can monitor their personal and business credit for free.

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This article was originally written on April 13, 2018.

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ABOUT AUTHOR

Gerri Detweiler

Education Director for Nav

Credit expert Gerri Detweiler is Education Director for Nav. She has more than three decades of experience in consumer credit education, has been interviewed in more than 3500 news stories, and answered over 10,000 credit questions online. Her articles have been widely syndicated on sites such as MSN, Forbes, and MarketWatch. She is the author or coauthor of five books, including Finance Your Own Business: Get on the Financing Fast Track. She has testified before Congress on consumer credit legislation.

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