The three credit reporting agencies — Experian, Equifax and TransUnion — use an array of information to determine the three-digit number known as your credit score. They look at your payment history, first and foremost, and they also consider how much debt you owe in relation to your credit limits. Other factors that impact your credit score include how much new credit you have, the mix of types of credit you have and the average length of your credit history.
Tax liens were once listed on your credit reports along with all the other information that is listed on your credit profile. When this was the case, unpaid tax liens could impact your credit score in a negative way, even long after you paid the lien off. In fact, these liens would stay on your credit report for up to seven years if you paid them off and a full 10 years if you didn’t pay them.
All of that changed in 2017 when the credit bureaus decided to stop including civil judgment records and half of tax lien data. By the next year, all tax liens were removed from credit reports from all three of the credit bureaus.
What is a tax lien?
According to the Internal Revenue Service (IRS), federal tax liens are “the government’s legal claim against your property when you neglect or fail to pay a tax debt.” The lien intends to protect the government’s interest in all your property, “including real estate, personal property and financial assets.”
Keep in mind that a tax lien is not the same as a tax levy. Where a levy allows for the legal seizure of your property to satisfy a tax debt, a lien is a formal claim against your property.
“A federal tax lien comes into being when the IRS assesses a tax against you and sends you a bill that you neglect or refuse to pay,” according to the IRS. “The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property.”
Does a tax lien affect your credit score?
Where tax liens once had the power to negatively impact your credit score, this is no longer the case. Since these liens are no longer reported on consumer credit reports, their power to damage your credit score has been nullified.
You should note, however, that there are plenty of other downsides to having a tax lien in place. As the IRS warns, a lien attaches to all your assets and to any future assets you acquire while the lien is in place. The lien will also attach to business property, including accounts receivable. If you eventually file for bankruptcy, the Notice of a Federal Tax lien can also continue after your bankruptcy is complete.
In other words, a tax lien can create myriad problems in your financial life even if it’s not listed on your credit report. For that reason, you should pay your tax liabilities in full and strive to avoid liens whenever possible.
Will your credit score benefit from the removal of a tax lien?
If you had a tax lien on your credit report in 2017 and it was removed sometime after, it’s possible your credit score experienced a bump but not very likely. According to the Consumer Financial Protection Bureau (CFPB), only around 4 percent of consumers with tax liens of civil judgments on their credit report in June of 2017 experienced a large enough increase to move to a “higher credit score band.”
This typically means their credit score “moved from being subprime to near prime or from near prime to prime,” reports the CFPB.
If you have a newer tax lien that was never reported on your credit report, it’s safe to assume this will have no impact on your credit score.
How to remove a tax lien from your credit report
You shouldn’t have any tax liens listed on your credit report since the credit reporting agencies chose to remove this information. As a result, you won’t have to take any additional steps to remove this damaging data.
However, it still makes sense to check your credit reports for incorrect information. After all, credit report errors are very common, and plenty of errors can have a negative impact on your credit score over the long haul.
According to the CFPB, errors you are most likely to find on your credit reports include incorrect personal information, accounts belonging to another person with a similar name as yours and incorrect accounts resulting from identity theft. Other common errors include incorrect balances and credit limits, debts listed more than once and accounts incorrectly reported as delinquent.
To figure out if any incorrect information is listed on your credit reports, you should head to AnnualCreditReport.com. This website lets you see your credit reports from all three of the credit reporting agencies once per year without any charge.
Once you access your reports, take the time to look them over for errors and incorrect information, including any negative data that might be damaging your credit score. If you do find incorrect negative information, take the steps to dispute the data on each of your credit reports that have it listed. For step-by-step directions, check out Bankrate’s guide on how to dispute errors on your credit reports.