If you owe the Internal Revenue Service (IRS) a tax debt and are facing collection actions like a lien on your property, you may wonder how an IRS tax lien affects your credit score and how to fix it.
The existence of a tax lien is not included in your credit report anymore, so it does not directly harm your credit score. However, there are several indirect ways that a tax lien can hurt your credit score.
What Is a Tax Lien?
A tax lien is a claim made by the IRS or your state’s tax agency. It is placed on property like your home, vehicle, bank accounts, and other real or personal property. The IRS filed nearly 197,000 notices of federal tax liens in fiscal year 2024, and over 179,000 in the previous fiscal year. You might see a tax lien when you owe tax debt and have failed to pay it off despite several tax bills, and have made no attempts to set up a payment plan or other solution.
How Does a Tax Lien Impact Your Credit Score?
As of 2018, civil judgments like liens are no longer included on credit reports. This does not mean a tax lien can’t still have significant financial impacts that can result in harm to your credit score. A tax lien can affect your credit score in the following indirect ways:
- Credit denial: When there is a tax lien on your assets, the IRS files a Notice of Federal Tax Lien, which is publicly accessible. Creditors can see this information, which can cause them to deny you credit opportunities. When creditors and lenders make hard inquiries to check your credit, this can impact your credit score.
- Financial difficulties: Owing tax debt and facing IRS collection actions likely means you are in a difficult financial situation, which can affect your credit if you are missing other payments. If you cannot secure credit because of the lien, this can, unfortunately, worsen your situation. Any debts you accrue will likely have penalties and interest, making it harder to pay back each form of debt.
- Bankruptcy: If your debt situation requires you to file for bankruptcy, this can cause severe harm to your credit score for several years. Additionally, a tax lien will likely follow you even after you file, attaching to the same or new assets.
- Private collection agencies: The IRS may assign your tax debt to a private collection agency. When these agencies engage in collection activities, this can harm your credit score. If other debt you owe because of your financial situation is sent to collections, this also impacts your credit score, even if the IRS does not outsource your tax debt collection.
The harm to your credit score can financially affect you for years. If you have received notice of an IRS tax lien, it’s crucial that you act quickly to address it and prevent further consequences.
How Can You Fix the Effects of a Tax Lien?
The fastest and most effective way to stop the effects of a tax lien is to pay your tax debt. When you pay the IRS or your state agency in full, the lien will be removed once the payment is processed.
Of course, most taxpayers who are dealing with a lien and the many financial consequences are only doing so because they can’t pay the debt. When paying your IRS debt would put you in financial hardship, there are other options to address your tax liability. The simplest method is entering into a payment plan, called an installment agreement. There are also ways to lower the total debt you owe, such as through penalty abatement or negotiating an offer in compromise.
These methods help you address your debt, and they pause certain collection actions like asset seizures. They don’t always remove the tax lien. However, once your debt is resolved, the lien will be removed. The sooner you begin negotiations with the help of a skilled Jacksonville tax preparation lawyer, the easier it is to resolve your debt and maintain your credit score.
FAQs About IRS Tax Lien Affects Your Credit Score and How to Fix It
Does an IRS Tax Lien Affect Your Credit Score?
An IRS tax lien can indirectly affect your credit score because the tax lien is publicly accessible information. However, the lien is not a part of your credit report. Instead, creditors can see that the IRS has a claim on your property, which can affect your ability to get credit and have collateral effects on your credit score. The lien shows banks, creditors, and other financial institutions that you owe the IRS a debt and have failed to pay it.
How Can You Get Rid of an IRS Tax Lien?
The most effective way to get rid of an IRS tax lien is to pay the debt you owe the IRS in full and immediately. When the payment is processed, the IRS will release the lien. If you cannot financially afford the tax debt, there may be other options to negotiate the tax debt, such as setting up a payment plan or requesting penalty abatement. Not all of these options remove the lien, but they can pause collection actions.
How Else Can a Tax Lien Impact Your Finances?
A tax lien can impact your finances beyond your credit score. It can prevent you from securing credit, prevent you from selling or refinancing assets, and impact employment with required security clearances. The IRS can end up being involved in the buying and selling of other assets, including putting liens on new assets. If you own a business, a tax lien can attach to business assets and affect your profits and your company’s reputation.
When Should You Hire a Tax Lien Lawyer?
You should hire a tax lien lawyer as soon as you get notice of a tax lien being placed on your property, especially if you don’t have the financial ability to pay your tax debt. It’s better to get an attorney before collection actions begin. When you can’t afford your tax debt, an attorney can help you assess your options for resolving the debt. There are ways to reduce your tax debt or give you more time to repay it.
TaxSmith, LLC: Your Tax Lien Attorney
At TaxSmith, LLC, we have over a decade of experience negotiating with the IRS. Reach out to our team to learn how we can help with your tax lien case.
