by: Anthony Parent 2013-08-08
An IRS Notice of Federal Tax Lien is unlike any other lien. One can be filed against you without a court order, and perhaps even without your knowledge. The worst part is that a Federal Tax Lien adds more stress to an already difficult situation: not only the do you owe back taxes to the IRS, but the Lien also will harm your credit score. How much? In this article we will discuss a particular case to demonstrate how a Federal Tax Lien will affect your credit score, and more importantly, we will also talk about what you can do about it.
According to the IRS:
"A Federal Tax Lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after the IRS:
The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property."
A client of ours, who monitors his credit score regularly shared this information with us:
"Before a Federal Tax lien was filed my credit score was 710. After a Federal Tax Lien in the amount of $36,000 was filed, my credit score dropped to 560. It lowered my credit score by 150 points."
Once a Notice of Federal Tax Lien is filed against you getting a traditional loan becomes difficult, if not impossible. We are not quite sure how ruining your credit make it easier for you to pay back the IRS, but regardless, that is the law.
The IRS has initiated something called the Fresh Start program. It allows liens to be withdrawn if a tax debt is paid in full. In addition, if you are in a direct debit installment agreement with the IRS, you may request a lien withdrawal if these conditions are met:
If you get into Currently non-collectible status, or a partial-payment installment agreement, the IRS will file a tax lien as a matter of right. We have seen Federal Tax liens removed in a personal Chapter 7 Bankruptcy, but typically they will not be (and then you have the problem of a Bankruptcy on your credit report).
The most common way to request a removal of a tax lien when you don't qualify for the Fresh Start program is to request a lien withdrawal to show that the lien is putting your income-earning ability at risk.
The other way to remove a tax lien is to have an Offer in Compromise accepted and paid. About 2 months after an Offer in Compromise is accepted and paid, the Notice of Federal Tax Lien will automatically be released. A Release is not as favorable as a Withdrawal (A Lien withdrawal erases the existence of a tax lien on your credit report, a release shows there was a debt and it is paid in full).
When going through this process of lien withdrawal, it's important to dot every i and cross every t...and perhaps anticipate that the IRS will kick something back at you on a technicality. If you need assistance with a tax debt or lien issue, contact us for a complimentary consultation.