If a taxpayer consistently fails to pay their taxes in full, the federal government may choose to file a tax lien. Tax liens can have serious ramifications for your credit report that can last several years. It is important for taxpayers to understand the implications of federal tax liens on their credit so that they can take measures to prevent, address and remove them.
How a tax lien affects your credit report
Having a tax lien on your assets and property can negatively affect your credit score. And the more your credit score declines, the more difficult it is to be approved for loans, credit cards, rentals or some jobs. Generally, liens are considered one of the most damaging entries on your credit report. In fact, liens can affect your credit score as severely as bankruptcy or foreclosure. While bankruptcy and foreclosure have time limits to how long they will appear on your credit report, tax liens do not. They may remain on your report indefinitely if you do not take action to address it. Fortunately, once you do pay a lien, it will generally be removed from your score after seven years.
Dealing with a tax lien
In many situations, it is possible to prevent a tax lien by paying your back taxes in full, or by working with a tax professional or attorney to set up a payment plan. If it is too late for you to prevent a federal tax lien, there are still ways to remove them. Once you have repaid the lien and filed your taxes in full for three years, you can have the lien withdrawn. If this is not an option for you, it may be possible to have the lien removed by allowing the IRS to withdraw tax payments from your checking account.