Unpaid Taxes and Your Credit

“…but in this world nothing can be certain, except death and taxes.”  –Benjamin Franklin

Welcome to tax season. For many people in the U.S., filing taxes can be something to look forward to, namely those who will receive a refund. For other people, filing taxes can also be a stressful experience if you know you’re going to end up owing your state or the federal government.

Hopefully if you owe taxes, you had the forethought to squirrel away funds throughout the year to take care of your obligation to your state or the Internal Revenue Service (actually, you’d write your check to the United States Treasury).

However, if you’re unprepared you should know that trying to hide from your tax obligation is not a good solution to your problem. Unpaid taxes can lead to a lot of unpleasant consequences, including tax liens which can cause you some significant credit problems if they end up on your credit reports.

Tax Liens and Your Credit Reports

If you fail to pay your taxes, does the IRS report the debt to the credit bureaus just like any other creditor? The answer to the question is no, they do not.

However, before you get too excited, you should realize that just because the IRS or your state taxing authority does not report the debt to the credit bureaus, it certainly doesn’t mean tax liens won’t appear on your credit reports some other way.

Tax liens are different from other negative items on credit reports due to the fact that they are not actually reported to the credit bureaus by the IRS or your state taxing authority. Instead, the three credit bureaus (Equifax, Trans Union, and Experian) proactively seek out information regarding public records by utilizing services such as PACER, which allows electronic access to court records and other public record vendors.

How Long Can Tax Liens Remain on Credit Reports?

When it comes to the negative items on your credit reports, most information – whether reported by a creditor or sought out by the credit bureaus themselves – has an expiration date. That is to say, the Fair Credit Reporting Act (FCRA) generally places strict and clear time limits on how long derogatory information is permitted to remain on a credit report.

Unpaid tax liens, however, are an exception to this rule. The FCRA never requires an unpaid tax lien to be removed from your credit reports, regardless of its age.

Paid tax liens, termed “released” liens, do have a credit reporting time limit, however. Released tax liens can only remain on your credit reports for up to seven years after the date of release. Unfortunately, during those seven years a released tax lien remains on your credit reports, it may continue to damage your credit scores.

Withdrawn Tax Liens

A few years ago the IRS introduced some new consumer-friendly policies which can apply to many tax liens. The policies, collectively known as the Fresh Start Program, give consumers the opportunity to have certain federal tax liens removed from their credit reports much more quickly than the typical FCRA required removal of seven years from date of release.

Under the Fresh Start Program, taxpayers with eligible liens can apply for a withdrawal of their tax lien under one of two circumstances. The first opportunity to apply for a lien withdrawal is available to taxpayers who satisfy their outstanding tax liens in full. The second opportunity occurs when a taxpayer enters into an approved automatic payment plan with the IRS and has made at least three consecutive payments toward exhausting the obligations. The credit bureaus, as a matter of policy, will remove withdrawn tax liens.

NOTE: While tax liens are currently part of consumer credit reports, the future may hold some consumer-friendly changes. The credit bureaus are currently considering the possibility of removing all tax liens and judgments from consumer credit reports and not ever reporting them again. While this is good news from a credit report perspective, it should not influence your correct decision to abide by your tax obligations.

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John Ulzheimer

Contributing Writer

John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. The author of four books on the subject, Ulzheimer has been featured thousands of times over the past decade in media outlets including the Wall Street Journal, NBC Nightly News, The Los Angeles Times, CNBC, and countless others. With professional experience at both Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.