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Unpaid-tax liens can hurt credit reports

Manage Your Credit Taxpayers who fail to properly report all of their earnings, or who take a tax credit fraudulently, could end up facing an audit. In addition, the Internal Revenue Service (IRS) can file tax liens against a citizen's estate.

A tax lien can be placed on a house, car, or business so that the IRS can recoup unpaid tax funds. Tax liens have been occurring with greater frequency of late, because the Obama administration has made tax collection one of the cornerstones of its plan to combat the mounting federal deficit.

The number of lien filings rose 14 percent from 2009 to 2010, CBS MoneyWatch reports. Since 1999, lien filings have risen by 550 percent, aided recently by the fact that many consumers have struggled with credit problems and seen their earnings drop as a result of the Great Recession.

While many taxpayers are aware that the IRS can file a lien or conduct an audit, some are unaware of the problems these actions can cause for their credit.

Once filed, a tax lien will stay on a credit report for as long as seven years, CBS MoneyWatch says. This means a tax lien can damage a taxpayer's credit just as much as a bankruptcy or a foreclosure, which also linger on credit reports for up to seven years.

Since credit reports are often checked by lenders and other credit issuers as a way to assess a borrower's risk, taxpayers who have a lien on their report will likely face a number of negative consequences. These can include seeing higher interest rates on home mortgages, higher premiums on insurance policies, or even a denial on a new credit card application.

A tax lien can be doubly dangerous for small-business owners. Recent studies indicate that many small businesses have had a harder time gaining access to traditional loans in the past few years, because some lenders have tightened their lending restrictions, due to a recent wave of defaults on consumer accounts as well as newly-enacted laws.

Small-business owners often rely on business or personal credit cards to finance their operations, so an increase in interest rates on debt payments can cause damage to the operation's bottom line.

Credit card offers for small businesses have been carrying higher-than-average interest rates for the last year, because issuers now view these operations as an increased risk, given the current economic climate.

While a tax lien can cause a variety of credit problems for consumers and businesses in the short-term, if taxpayers leave this debt unpaid, the IRS can also seize the asset attached to the lien, CBS MoneyWatch says.

Consumers who repay the IRS also need to take further action to protect their credit reports, since simply paying a lien isn't always enough to remove the harmful information from a credit report, the news source says.

However, the IRS recently released a number of amendments to the rules regarding tax liens, according to CBS MoneyWatch. These changes included raising the minimum amount of unpaid back taxes that trigger a lien from $5,000 to $10,000.

Under the new guidelines, consumers can also ask the IRS to withdraw a lien from their credit reports once the funds are paid. Taxpayers who want to remove a lien on their reports will need to ask the IRS for a certificate of withdrawal, which the taxpayer must then send to the three major credit bureaus.

Once the certificates of withdrawal are sent, the bureaus are legally obligated to remove the liens from the consumer's credit reports. However, because the risk of human error always exists, consumers should follow up by reviewing their credit reports to ensure that the changes have gone through as requested.

 

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