American showman P.T. Barnum said, “There is scarcely anything that drags a person down like debt.”
Tax debt has serious ramifications. It can have a negative impact on your credit. It may even cause you to lose properties that you own. The Internal Revenue Service (IRS) can file a tax lien against you to ensure that you pay your outstanding tax obligations to the federal government.
What is a Tax Lien?
A tax lien is a notice to the public informing them that the government has a claim on all or some of your assets, even future ones acquired during the duration of the lien because you failed to pay a tax debt on time. The asset acts as collateral against the money you owe. This means that if you decide not to pay your taxes, you are giving the government the right to seize your property.
It goes without saying that a lien is a bad news. Since it becomes public record, anyone can view it… including credit reporting agencies.
This badly reflects on your credit report for years, even after you have already paid what you owe. Unpaid tax liens will stay on your credit report forever. You may find yourself with less than ideal opportunities to get new credit or to refinance existing credit.
Same with everything, prevention is better than cure when it comes to tax payments. You can prevent the IRS from filing a lien against you by paying your taxes in full and on time. If you can bring your outstanding balance under $25,000, you can try to get a streamlined installment agreement. But if the damage has already been done, do not fret. There is still something that you can do.
How to remove a tax lien from your credit report?
In 2011, the IRS introduced the Fresh Start Program. This program states that if a taxpayer pays his or her outstanding tax bill in full, then the IRS will allow for the release of the lien, typically within 30 days.
The taxpayer may also set up an installment agreement with the IRS. You can apply for this online. If you have made at least three consecutive payments in the direct debit payment plan, then you may request for the release of the lien.
Once you have made your payment (whether in full or installment), you should receive Form 668Z (Release of Federal Tax Lien).
You must process your request by filling out a Form 12277 (Application for Withdrawal) and submitting it to the IRS office assigned to your account along with Form 668Z and Form 668Y (Notice of Federal Tax Lien).
After some time, the IRS should provide you with a copy of the lien release Form 10916C (Withdrawal of Filed Notice of Federal Tax Lien).
Forward a copy of the form to the credit reporting bureaus to update your credit reports.
Bear in mind that the laws on liens can vary. It would be wise for you to seek the advice of a tax attorney, a certified public accountant, or your state or local tax authority.