Does a Tax Lien Hurt Your Credit Score?
Does a tax lien affect your credit score? Understand the current reality of tax liens, their impact, and what it means for your financial health.
Many individuals wonder about the financial implications of a tax lien, particularly how it might affect their credit score. This concern is common, given the significant role credit scores play in various aspects of financial life, from securing loans to renting property. Understanding the current relationship between tax liens and credit reports is important for anyone managing their financial health. This article clarifies how tax liens operate and their present impact on credit.
Understanding a Tax Lien
A tax lien represents a legal claim asserted by a government entity, such as the Internal Revenue Service (IRS) for federal taxes or a state tax authority, against a taxpayer’s property. This claim arises when a taxpayer fails to pay a tax debt after receiving proper notice and demand for payment. The lien secures the government’s interest in all of the taxpayer’s property, including real estate and personal assets, as well as any future acquired property. It essentially serves as a public notice to other creditors that the government has a secured interest in the taxpayer’s assets. While a serious legal claim, its filing or enforcement processes are distinct from its credit report appearance.
Credit Score Impact of Tax Liens
Historically, tax liens harmed credit scores because they appeared on consumer credit reports. Before 2018, both paid and unpaid tax liens were included on credit reports by the three major credit bureaus (Equifax, Experian, and TransUnion). This lowered credit scores, making it challenging to obtain new credit or loans.
In 2017 and 2018, the National Consumer Assistance Plan (NCAP) led to changes in credit reporting. The credit bureaus implemented stricter standards for public record data, requiring more complete personally identifiable information. Because of inconsistent reporting and insufficient identifying information, credit bureaus removed all tax liens from consumer credit reports.
As of April 2018, federal and state tax liens no longer appear on standard credit reports and therefore do not directly affect credit scores. However, while the direct impact on credit scores is gone, the underlying tax debt can still pose challenges. For example, if the unpaid tax debt leads to other collection actions, such as wage garnishment or asset seizure, these actions could still indirectly impact your financial standing. Lenders may also have other ways to discover tax liens, as they remain a matter of public record.
Discovering a Tax Lien
Given that tax liens no longer appear on standard credit reports, individuals must use other methods to determine if one has been filed against them. For federal tax liens, the Internal Revenue Service (IRS) typically sends a Notice of Federal Tax Lien to the taxpayer. To directly check for a federal tax lien, individuals can contact the IRS Centralized Lien Operation.
State tax liens are also matters of public record and can be found through state or county government offices. This involves checking with the state’s Department of Revenue or Taxation, or searching public records databases maintained by county offices. These public records are accessible and can be searched by name or property details. Knowing if a tax lien exists is important because it represents a legal claim against assets, even if it does not appear on a credit report.
Credit After Tax Lien Resolution
When a tax lien is resolved, usually by paying the debt, the IRS or state tax authority issues a “release of lien.” The IRS is generally directed to release a federal tax lien within 30 days of the tax liability being fully satisfied or becoming legally unenforceable. While this release removes the legal claim on assets, it does not directly improve a credit score because the tax lien was not on the credit report to begin with.
Resolving the underlying tax debt is important for overall financial health. Although the lien itself won’t affect your credit score, failing to address the debt can lead to further collection actions by tax authorities. These actions, such as bank levies or wage garnishments, can create financial strain that might lead to missed payments on other debts, which would then negatively impact credit. In severe cases, unresolved tax debt can contribute to bankruptcy filings, which do appear on credit reports and have a negative effect. Therefore, proactively resolving tax liens prevents further financial complications that could indirectly harm credit.