How to Remove Tax Liens from your Credit Report

September 5, 2016

How to Remove Your Tax Liens from your Credit Report

Tax lien is the right of the IRS or state or country to take possession of the property in-case of negligence in paying property tax or income tax. It is filed in-order to force the tax-payer to pay his/her outstanding tax amount. However, when filed it is also recorded in the public record and then added to the consumer credit report. It can be viewed by anyone including credit reporting agencies.

Tax lien has derogatory impact on the credit score. Consumers with no other credit issues could lose 100 points with tax lien. Being one of the most difficult credit issues to overcome, it can stay on the credit report for 7 years and in certain situation, forever! Unlike other collection accounts, it is not mandatory by the law to remove it from credit report after 7 years. According to Fair Credit Reporting Act (FCRA), the tax lien may be removed from credit report, 7 years after the date of payment of outstanding tax amount.

So, How do you remove tax liens from your Credit Report?

The good news is that It is possible for consumers to remove the tax liens prior to 7 years, as long as it’s paid. The ‘Fresh Start Initiative’ from IRS has released new policy to handle tax liens. Full payment of outstanding tax amount will facilitate taxpayers to withdraw lien from credit history, upon request. Some eligibility criteria facilitates taxpayers to withdraw after a minimum of 3 payments towards the payment agreement. However, it should be noted that removing tax liens from credit history is not always possible, but customers can try a number of steps to get the lien removed.

Do You Qualify? You may request to withdraw tax lien for credit report if:

  • You have paid the full amount you owe and lien has been released
  • For past three years, you are in compliance with providing your individual, business returns
  • You are up-to-date on your tax payment and deposits
  • You owe $25,000 or less and have agreed on the direct debit installment payment toIRS, from your back account automatically.

You could ask tax professionals to learn more about the eligibility criteria. Pay the Outstanding Tax Amount:

  • After full payment of you due, you may receive the IRS Form 668(Z) for ‘Release of Federal Tax Lien’
  • Fill out IRS Form 12277 for ‘Application of Withdrawal’
  • Submit ‘Notice of Federal Tax Lien’ IRS Form 668(Y) along with above two form to IRS and provide explanation of why you want your tax lien to be withdrawn.
  • You may receive the IRS Form 10916(c) for ‘Withdrawal of Filed Notice of Federal Tax Lien’. It is also filed in the recording office where the original NFTL was filled.

You may produce these documents to the credit reporting agencies or ask IRS to to notify them.

Summary: How to remove tax liens from your credit report

Above all, send a goodwill letter to all three credit bureaus, explaining your full payment of outstanding money. Give honest reason why you defaulted. Address the issues behind tax lien and steps you took to pay what you owe. Moreover, be patient! The complete process may take months to reflect on your credit report.

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Tax liens and judgments to vanish from credit reports, starting July 1

Tax lien credit report removalImagine waking up one morning and finding that some of the most negative information on your credit report was gone.

This may have happened to you on July 1, 2017, due to sweeping changes the Big 3 credit bureaus (Equifax, Experian and TransUnion) are making to their reporting processes for tax liens and judgments.

If a lien or judgment on your report doesn’t meet the following standards, it will vanish from your credit reports:

  1. The record must have your name, address and either your Social Security number OR date of birth: Inaccurate reporting can cause various mix-ups, including negative information landing on the wrong credit files. So, beginning July 1, if the data regarding your tax lien or judgment doesn’t have the required personal information attributes, “It’s got to go,” says credit expert John Ulzheimer.
  2. The record of your lien or judgment must be reverified every 90 days: The status of liens and judgments can change, Ulzheimer explains. Liens can be released, and a judgment can be satisfied. If the bureaus can’t commit to reverifying your lien’s or judgment’s status every 90 days, they will likely drop them entirely.

“Reverifying something every 90 days is not cheap,” Ulzheimer says. “It’s a loss for [the bureaus], and there’s no way to recoup the investment. They can’t go out and charge someone for that.”

Which records get dropped may depend on the ease with which they can be verified, and some courthouses make that easier than others. For example, some make records available electronically, while others don’t, Ulzheimer says.

The credit bureaus aren’t dropping negative public-record information from reports to be nice; it’s the result of the recent regulatory environment. In 2015, the credit bureaus reached a multi-state settlement with more than 30 attorneys general. Out of this settlement came the National Consumer Assistance Plan (NCAP) a plan of action that satisfies the settlement’s aims (making the credit-reporting industry more transparent and consumer-friendly, basically).

Simultaneously, the Consumer Financial Protection Bureau (CFPB) has been sounding the alarm about various weaknesses in the consumer-credit reporting industry, particularly personal data inaccuracy.

These factors have created pressure for the bureaus to incorporate the removal of tax liens and judgments into NCAP, if they can’t ascertain their accuracy and reverify them regularly.

How many liens and judgments will be affected?

Not all liens and judgments will disappear from all credit reports – only those that don’t meet the above criteria.

However, per Ulzheimer a lot of these records will indeed vanish. Millions of credit reports have liens and judgments on them, he says. And the new standards will likely expunge 50 percent of liens from credit reports and virtually all of judgments, based on what he’s heard from the industry.

What it means for consumers, the industry

For consumers, the news is good.

“The knee-jerk reaction is, ‘How great is this for consumers?’” Ulzheimer says. “And it is. The consumer who has a lien and a judgment is basically going to wake up one morning in July and that information is probably going to be gone. Their credit score is going to go up as a result, and it may go up a lot.”

Tax liens and judgements are a drag on credit scores. So, if you don’t have other negative information on your credit report (such as delinquent credit cards and loans), you can expect a nice lift. FICO, for its part, estimates that most consumers who get a boost will see a modest improvement of under 20 points on average. Even a modest bump, however, could take you from, say, bad to fair credit – which could qualify you for more credit products.

The good news ends, however, when you look at it from the credit-reporting and lending industries’ perspectives.

“There’s a reason why judgements and liens have been on credit reports for more than three decades,” Ulzheimer says. “It’s valuable information.”

And the ripples of these changes will be felt throughout the reporting and lending industries. For credit bureaus, removing these pubic records “dilutes the value of their core product,” Ulzheimer says. Scoring models (like FICO and VantageScore), will have to adjust their algorithms. Lenders will have to figure out how they’re going to assess risk.

Even consumers shouldn’t get “tunnel vision” while celebrating what must seem like a godsend, Ulzheimer warns. Liens and judgments will still exist, even if they’re not on your credit reports. And so will the legal ramifications of not paying them. A lender might still search public records before approving you, at which point they’d discover any liens and judgments. And removal of these negative accounts from your credit reports may be only temporary.

“If the bureaus figure out a way to get the information and verify it every 90 days, there’s nothing to say they can’t put it right back on the credit report,” Ulzheimer says.

Five Steps to Removing an IRS Tax Lien From Your Credit Report

One facet of credit reporting rules that probably causes more hand-wringing than any other is the removal of paid negative listings—or rather, the lack of removal. Logic seems to suggest that once you have paid off an item like a delinquent credit card, collection account, or judgment that it would be taken off your report. However, that generally hasn’t been the way credit reporting laws have operated. Paid-off negative items can stay in your credit file for the full amount of time allowed by law even after you have paid them.

In the past, the same was true of IRS tax liens that had been resolved; they were going to stay on your reports for seven years. However, the IRS has taken steps to change that. There is now a process in place to have paid federal tax liens removed from your credit file for good.

Step 1: Complete IRS Form 12277

This form serves as a request for withdrawal of the original tax lien. Before filling out this form, try to locate the Form 668(Y) you were sent by the IRS as notification of the original tax lien. This can help to expedite the process. However, you can still fill out this form if you don’t have the 668(Y).

For questions 11 on the form, select the option that states:

“The taxpayer, or the Taxpayer Advocate acting on behalf of the taxpayer, believes withdrawal is in the best interest of the taxpayer and the government.”

For question 12, enter the words “Fresh Start Program.”

Step 2: Send Form 122277 to the IRS

Use IRS publication 4235 to determine the regional IRS office where your form should be mailed. Send your form via certified mail.

Step 3: Wait for response from IRS

After 30-45 days, the IRS will contact the courthouse where the lien was filed to notify them to withdraw it. You will also be sent a copy of this notification.

Step 4: Dispute the lien with the Credit Reporting Agencies

Dispute a tax lien with Equifax, Experian or TransUnion at their respective websites. They’ll then contact the courthouse where the lien was filed to determine if the information is still accurate. Since the courthouse has already been notified that your lien was withdrawn, you should be able to have the lien removed quickly.

Step 5: Final confirmation

Each of the credit reporting agencies will send you a notification of how your dispute turned out. If the lien was not removed from any or all of your reports, file a second dispute in writing and include a copy of the notification from the IRS that your lien has been withdrawn.

Here's How To Get Tax Liens Scrubbed Off Your Credit Report

Tax lien credit report removalFlickr/David Goehring

On February 24th the IRS announced new policies regarding the collection of unpaid taxes and liens. Specifically, if the tax payer pays their liens "in full" the IRS will "withdraw" them. What does this mean for consumers' credit reports?

Simply put, tax liens are now the only derogatory item on a credit report that will be removed once it has been paid, as long as you play your cards right.

Do you have an IRS tax lien on your 2013 credit report? Visit here to see your full report online now.

An unpaid tax lien can remain on a credit file indefinitely per the Fair Credit Reporting Act. In the old days, pre February 24th, even when paid the lien remained on file for an additional 7 years and was only shown as "released." And, a released tax lien is just as bad for your credit as an unpaid tax lien. This new IRS policy suggests that if you pay your liens in full they will be removed from your credit files much sooner, and this was confirmed by all three credit reporting agencies and their trade organization, the Consumer Data Industry Association (CDIA). According to Norm Magnuson, Vice President of Public Affairs for the CDIA, "I've confirmed that all three credit reporting agencies remove withdrawn IRS tax liens."

Tax liens are one of FICO's "Seven Deadlies" and can severely damage your FICO scores for years. The new IRS policy offers hope to consumers who want to clean up their credit sooner rather than later. However, some don't agree that this is a good idea. IRS liens, which can remain on a credit report longer than anything else, are now the only derogatory item that could be removed once paid. This "opportunity" doesn't apply to any other derogatory debts such as collections, foreclosures, repossessions or defaulted credit cards. Ironically, this is the type of "pay for deletion" scenario that is generally frowned upon by the credit reporting industry.

The question some are asking, and it's a legitimate concern, is whether or not the removal of a tax lien waters down the value of the credit report. If tax liens are indicative of elevated credit risk, and they are, then removing them would mask the consumers true credit risk. Lenders could be duped into granting credit for someone they may have considered too risky if they had seen the lien. Still, "most people with a tax lien have other negative history and that other negative history will continue to weigh down their score", according to FICO spokesperson Craig Watts.

The new IRS policy doesn't apply to tax burden settlements. The new IRS rules don't offer a withdrawal if the lien is only settled, "Full payment" is required, according to the IRS website. So, if you can't afford to pay off your lien in full you'll still eventually have a released lien on your credit files for 7 years from the date it was settled.

If the lien is the only negative item on your credit reports, and if the lien is fairly recent, this new IRS policy can result in a monumental change in a consumer's score. In fact, my estimates show a potential 100 to 200 point increase, under some circumstances. At the very least a consumer's score should improve. The amount of the improvement will be determined by the age of the lien and what other negative items, if any, are on the consumer's reports.

Withdrawal of the lien is only at the consumer's request. This is important as the process to have the lien removed isn't "autopilot." In fact, if consumers are unaware of the new IRS policy they might never ask to have the lien listed as "withdrawn", and thus they'd have 7 more years of credit reporting. The IRS announcement is clear on that matter, "Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it." Consumers with withdrawn liens should notify the credit reporting agencies of the new status and ask them to be removed.

Finally, approved payment plans for larger liens will also result in a withdrawal perhaps even before the full payment has been submitted. In these cases the credit reporting could be stopped even before a full lien balance has been exhausted. The IRS was in a good mood yesterday.

Do you have an IRS tax lien on your 2013 credit report? Visit here to see your full report online now.

Has your credit score increased lately? This may be why

Tax lien credit report removal Tax lien credit report removal Image:

The three major national consumer credit bureaus — Equifax®, TransUnion® and Experian® — estimate that about half of all tax liens and nearly all civil judgments have been removed from consumers’ credit reports as of July 1.

The change is a part of the National Consumer Assistance Plan (NCAP), which is a result of discussions and an agreement between the three major credit bureaus and 31 state attorneys general reached in 2015.

The NCAP includes a series of actions and policy changes that are intended to improve credit reporting data accuracy, quality and consumer credit education.

Tax liens and civil judgments on your reports can lower your credit scores, so the removal of this information from credit reports could lead to an increase in scores — for some.

Other credit report changes include prohibiting adding medical debt to credit reports until at least 180 days after the account is reported to the credit reporting agency and the removal of previously reported medical collections that have been or are being paid by insurance.

The NCAP requires new and existing public record data to meet certain criteria in order for them to appear on your consumer credit reports, including:

  • The public record data must have your name, address, and either your Social Security number or your date of birth.
  • The data furnisher of the public record information must visit the applicable courthouse at least once every 90 days to obtain newly filed and updated public records.

What if I've never had a tax lien or civil judgment?

If you didn't have a tax lien or civil judgment on your credit reports before, your reports won't change and there won't be an effect on your credit scores as a result of these changes.

The enhanced public record data standards apply to new and existing bankruptcies, tax liens and civil judgment data in consumer credit reporting databases.

If you have a bankruptcy, your credit may not be affected by these changes, but the bureaus anticipate that over 95 percent of civil judgment records and over half of tax lien records don’t meet the enhanced data requirements.

As a result, Experian, Equifax and TransUnion will no longer include the noncomplying tax liens and civil judgments on their consumer credit reports.

Once the credit bureaus remove this information, you may see your credit scores increase.

But don’t necessarily expect a huge jump.

The average score increase will be modest.

Both TransUnion and Equifax found that about 9 percent of people in the national consumer credit databases have either a tax lien or judgment reported on their credit file.

That’s about 19.8 million people who could be affected by the change.

Two of the biggest credit scoring models in the United States, FICO and VantageScore, both analyzed credit files to see how the changes might affect consumers.

FICO ran a study based on a national representative random sample of about 10 million credit files from each credit reporting agency. It used information from the credit bureaus to distinguish between public records that will and won’t be removed.

The study found that 6 to 7 percent of the people who FICO can score had a judgment or tax lien removed from their file as a result of the enhanced public record standards.

FICO also found that the same people tend to have other derogatory information on their credit file, which can lead to low credit scores even if tax liens and judgments aren’t included.

Other results from the study show that:

  • Over 75 percent of people impacted may see their scores increase by fewer than 20 points.
  • 5 percent to 1 percent (depending on the underlying credit report) could have a FICO Score 9 increase of 20 to 39 points.
  • About 0.2 percent of people who have a FICO Score 9 may see their scores increase by 60 or more points.

Could my score go down because of the change?

FICO's study found that less than 1 percent of consumers' FICO score 9 scores will decrease (most often by 1 to 19 points) after the changes take effect. It says that this can happen when a consumer moves into a different scorecard and as a result gets scored based on slightly different criteria.

VantageScore ran a similar study using its VantageScore 3.0 credit-scoring model to analyze credit files of 4 million consumers and the impact of removing all tax liens and civil judgments.

It found that just over 8 percent of the people that VantageScore can create a credit score for would see a change in their VantageScore 3.0 scores. Among that group, there was an average 10 point increase.

Most people who would see a score change had credit scores between 300 and 600 points.

If you’re looking at your VantageScore credit scores, you may see other credit-model-related changes soon. VantageScore is updating its scoring model to VantageScore 4.0, which will be available in fall 2017.

Sarah Davies, senior vice president of analytics, research and product management at VantageScore, says, “(tax) liens aren’t going to carry as significant a penalty in VantageScore 4.0 as in 3.0.”

Remember, the NCAP guidelines are only expected to remove about 50 to 60 percent of tax liens from consumers’ reports.

Consumers who still have a lien on their credit reports after the change may see a score improvement with VantageScore 4.0’s release.

“But it’s not a guarantee,” Davies says. “It depends on what’s in the rest of their credit file.”

Lenders may still consider tax liens and civil judgements.

A tax lien or civil judgment can still impact you even if it no longer appears on your credit reports or affects your credit scores. This may be particularly true for those trying to get a mortgage.

LexisNexis Risk Solutions, an aggregator and seller of information that commercial organizations, government agencies and nonprofits use to evaluate individuals, businesses and assets, found that mortgage borrowers who have a judgment or tax lien are 5 ½ times more likely to go into pre-foreclosure or foreclosure.

Mortgage lenders, therefore, may still want to see this information when reviewing an application.

For example, Fannie Mae, a government-sponsored organization that buys mortgages from mortgage lenders, requires its approved lenders (the mortgage lenders that you may work with) to follow its selling guide.

The Selling Guide specifies that borrowers must pay off delinquent credit, including judgments and tax liens, at or before closing.

How will mortgage lenders find out? LexisNexis now offers a LexisNexis RiskView Liens & Judgments Report, which was created specifically to fill in the tax lien and judgment information for lenders.

When you apply for a mortgage, the mortgage lender will pull your credit from the big three credit bureaus and could also pull the LexisNexis report and make a decision based on the combined information.

There are several important changes to credit reporting and scoring coming in the next few months. The removal of some tax liens and judgments from credit reports is an important one that may increase some consumers’ credit scores.

However, any score increase will likely be minimal and in rare cases your scores could drop. You can keep an eye on if, when and how these changes affect you by monitoring your credit reports from two credit bureaus for free using Credit Karma.

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