Understand Tax Liens


The Internal Revenue Service (IRS) and other taxing authorities file and publish tax liens to collect unpaid taxes. A tax lien and a tax judgment are for practical purposes one and the same, and the terms are interchangeable. Under United States Code Title 26 Section 6321:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

The IRS must send the taxpayer a notice of the lien within five days of its issuance. The taxpayer then may appeal the notice administratively and seek judicial relief in the United States Tax Court, the United States Court of Claims, the local United States District Court, or the United States Bankruptcy Court from an unfavorable administrative result. Constructive notice to third parties, particularly creditors, is by the filing of a notice of the lien in the public records, usually of the county courthouse, of the state where the taxpayer resides that the IRS has a claim against all taxpayer property owned as of and acquired after the delinquency assessment date. Unlike liens of judgment creditors and mechanics, which attach specific properties or sources of income, tax liens are claims against all taxpayer property and rights to property, including income from any source.

A tax lien has the same harmful effect on the taxpayer’s credit as does an adverse judgment. All three (Equifax, Experian, and TransUnion) major credit rating agencies include tax liens on their consumer credit reports. Tax liens once included can be difficult to remove. If unpaid they remain on the credit reports for 10 years. If released after compromise or settlement on less than full payment of the amount owed, they remain for the standard seven years; however, the IRS announced in 2011 that it will withdraw any notice of federal tax lien in cases of assured full payment if the taxpayer requests withdrawal by a formal filing (Form 12277). If the IRS withdraws the lien the taxpayer must notify the credit rating agencies of the withdrawal so they can confirm it will remove the lien from their reports. Unlike commercial creditors, the IRS does not interact regularly with the agencies.

The provision for immediate removal is a significant and unique consolation about tax liens. They are the only negative credit report items subject to immediate removal when paid in full. Collections, repossessions, foreclosures, defaulted credit cards, medical bills, judgments, and all other such credit report items are subject to the standard seven-year rule for removal.

While it remains on credit reports a tax lien is a serious financial handicap for the consumer. Credit agencies do not disclose their rating methodologies but a reasonably reliable rule of thumb is that payment history, the major criterion they consider, accounts for roughly 35 percent of a consumer’s score, the ratio of debt to income accounts for about 30 percent, the time frame of positive (or negative) credit history about 15 percent, the mix of credit types (credit cards, student loans, mortgages) 10 percent, and the number of recent new credit applications 10 percent.

As a collection action on an unpaid debt, a tax lien would be part of the payment history criterion. In order of credit negativity the effects of a tax lien would fall between several late credit card payments and a declaration of bankruptcy. Tax obligations are primary, and few lenders or creditors would see in a delinquent taxpayer a good prospect for a substantial loan or line of credit.

As always, if you are having tax lien’s being reported on your credit reports, call Credit Repair and have them assist you.