Paid and Withdrawn IRS Tax Liens to be Removed From Credit Files

Feb
25
2011

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 a tax lien that needs to be removed? Click here to see your updated credit report and score.

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Vice President of Public Affairs for the CDIA, “I’ve confirmed that all three credit reporting agencies remove withdrawn IRS tax liens.”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 a tax lien that needs to be removed? Click here to see your updated credit report and score.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

Comments

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  • GG
    December 15, 2011

    Great info here! Thanks for the update.

    Question #! I payed off my back taxes to the IRS through an Offer in Compromise. Is that considered paid in full? Can I have the leins completely withdrawn from my credit report?

    Question #2 or #4 actually. What about State taxes? I payed off my State taxes in full. How do I get State taxes removed from my credit report?

  • SBJR06880
    January 13, 2012

    To answer Question # 1, the IRS will only withdraw your tax lien when all terms of the OIC have been met. The offer terms include that for a five year period, beginning from the date of acceptance, that all tax returns and required taxes are paid.

  • RD
    January 13, 2012

    In September of 08, the IRS filed a lien against me. After filing taxes from 03 to prove a bankruptcy, it showed that I did not owe them at all. In fact, after filing for that year, I would have been given a refund of $1800, had it been filed when it was due. In August of 11 I was given a Cert of release, along with a substantial refund. My problem is the released lien appears on the 3 credit reports, obviously having an adverse effect on my credit score. I have been working with a tax payer advocate who is telling me form 12277 is used only to release the lien and there is nothing I can do about having it removed from the credit reports. Is this true?

  • January 20, 2012

    #1 – I don’t think so. According to the IRS the lien must be paid in full in order to have it withdrawn. And OIC is a settlement for less than the full amount. But yes, if you’re able to get the lien withdrawn then the credit bureaus will remove them from your credit reports.

    #2 – This is only for Federal tax liens.

  • January 20, 2012

    I don’t think that’s right. An OIC is a settlement and the IRS press release suggested that the lien had to be paid in full in order to get a withdrawal. You can get it released with a completed OIC, but that’s not going to result in removal from your credit reports.

  • January 20, 2012

    The form numbers listed in my article came directly from the IRS’s press release and I’ve seen several examples of the new IRS policy in action so I’m not sure what you’re being told is correct.

  • CW2012
    May 14, 2012

    I have a tax lein on me and about 3 years ago my IRS case reached its statute of limitations. Since then i have been receiving my refunds again and the IRS told me that they would have the lein removed from my credit. It is still there. What can I do to get this removed?

  • May 15, 2012

    It’s interesting that the IRS told you they would have it removed from your credit reports. They have no influence over whether or not a lien is reported. The only reason it’s reported is because it’s a public record and the credit bureaus go to courthouses and pull them. It’s not like they’re a bank who proactively reports information to the credit bureaus and can have it removed or modified. The only way to get it removed from your credit reports permanently is for the IRS to file a withdrawal of lien, not just a release of lien. A release won’t result in the removal. It’s got to be withdrawn.

  • Wlwriter
    May 16, 2012

    Experian still refuses to wipe my “released” federal tax lien off its credit report stating I have two more years left of the seven even though it was paid off. They state there is no such legislation that requires them to remove it before seven years. What can I do?

  • May 21, 2012

    They’re correct. Released tax liens can be reported for 7 years from the release date. That’s straight from the Fair Credit Reporting Act section that defines how long various types of adverse information can be maintained on credit reports. Withdrawn tax liens, which are different than released tax liens, are the ones that are removed immediately.

  • Rob Usa
    May 22, 2012

    Released isn’t the same as a withdrawal. Get the following IRS Publication, follow the directions if you meet the requirtements (you probably do because your lien has been released, BUT IT NEEDS TO BE PAID IN FULL OR YOU’RE INTO AN AUTOMATIC PAYMENT AGREEMENT)….complete the request, and wait. If you’ve done what they need tou to do and they approve the withdrawal, YOU MUST REQUEST THE IRS CONTACT THE CREDIT REPORTING AGENCIES. Once you’ve done all that, follow-up with ALL the different credit reporting agencies to ensure the IRS contacted them to literally withdraw (remove) any record of your previous tax liens. If they haven’t, contact the IRS Advocate ASAP!

    Publication 594 (Rev. 4-2012) Catalog Number 46596B Department of the Treasury Internal Revenue Service http://www.irs.gov

  • Rob Usa
    May 22, 2012

    See my post above, BUT…. it’s my understanding that the taxes owed must be paid in full or a payment plan (EFT, for example) must be in place to be favorably considered vice released due to a statute of limitations settlement. It wouldn’t hurt to try though. Good Luck!

  • Rob Usa
    May 22, 2012

    NO!!!! That is NOT TRUE. Get and read the following (and provide a copy to your Advocate!

    Publication 594 (Rev. 4-2012) Catalog Number 46596B Department of the Treasury Internal Revenue Service http://www.irs.gov

  • Rob Usa
    May 22, 2012

    A “withdrawal” removes the Notice of Federal Tax Lien from public
    record. The withdrawal tells other creditors that we’re abandoning our
    lien priority. This doesn’t mean that the federal tax lien is released, or
    that you’re no longer liable for the amount due.
    Page 5
    We (THE IRS) may withdraw a Notice of Federal Tax Lien if:
    • You’ve entered into an Installment Agreement to satisfy the tax
    liability, unless the Agreement provides otherwise. For certain types of
    taxes, we’ll routinely withdraw a Notice of Federal Tax Lien if you’ve
    entered into a direct debit installment agreement and meet certain
    other conditions,
    • It will help you pay your taxes more quickly,
    • We didn’t follow IRS procedures,
    • It was filed during a bankruptcy automatic stay period, or
    • It’s in your best interest (as determined by the Taxpayer Advocate) and
    in the best interest of the government. For example, this could include
    when your debt has been satisfied and you request a withdrawal.
    For more information, see Form 12277, Application for Withdrawal of
    Filed Notice of Federal Tax Lien.
    How to apply for a “discharge”

  • May 22, 2012

    Rob, the IRS does not have anything to do with credit reporting. You’re wasting your time trying to get them to contact the credit bureaus. They’ve gone on record time and time again saying the same thing. Once you have the withdrawal in hand/filed, then YOU have to contact the credit bureaus and let them know it has been withdrawn. They’ll confirm the withdrawal AT THE COURTHOUSE (not with the IRS directly) and then remove the lien when they’re able to verify that a withdrawal has been filed.

  • May 22, 2012

    Rob, the IRS does not have anything to do with credit reporting. You’re wasting your time trying to get them to contact the credit bureaus. They’ve gone on record time and time again saying the same thing. Once you have the withdrawal in hand/filed, then YOU have to contact the credit bureaus and let them know it has been withdrawn. They’ll confirm the withdrawal AT THE COURTHOUSE (not with the IRS directly) and then remove the lien when they’re able to verify that a withdrawal has been filed.

  • May 22, 2012

    They’re correct. Released tax liens can be reported for 7 years from the release date. That’s straight from the Fair Credit Reporting Act section that defines how long various types of adverse information can be maintained on credit reports. Withdrawn tax liens, which are different than released tax liens, are the ones that are removed immediately.

  • May 22, 2012

    It’s interesting that the IRS told you they would have it removed from your credit reports. They have no influence over whether or not a lien is reported. The only reason it’s reported is because it’s a public record and the credit bureaus go to courthouses and pull them. It’s not like they’re a bank who proactively reports information to the credit bureaus and can have it removed or modified. The only way to get it removed from your credit reports permanently is for the IRS to file a withdrawal of lien, not just a release of lien. A release won’t result in the removal. It’s got to be withdrawn.

  • May 24, 2012

    I just received a form 668(z) cerificate of lein release $33,508 NIce!

    God I hope it comes off the credit report.

  • May 25, 2012

    Good Luck, Michael. Please come back and let me know if you were successful.
    John

  • thekid
    May 30, 2012

    So what is it, I have just received a 668 certificate of release from the IRS, I have just read some of the comments speaking about a “withdrawal”. Some of the comments suggest only a withdrawal will get the credit agencies to take it off your credit report. So my question is do I still need to get a withdrawal from the IRS. I have already notified the credit agencies of the release and not waiting on a reply to my dispute. I had 2 liens and just pad off the other, the IRS told me that one would “self release”. Do you recognize the term and what can you tell me about it. I am working very hard to clean up my credit and after these 2 are taken care of , will only have 2 negative listing left. Thank you in advance for any info you can give.

  • thekid
    May 30, 2012

    Spell check should have been “now “( not ) waiting, and paid instead of pad. my bad

  • May 31, 2012

    Released and withdrawn are two completely different things. Released will NOT result in a tax lien being removed from your credit reports. Released tax liens are removed from your credit reports 7 years from the release date. Withdrawn tax liens are removed immediatley.

  • Lafcadio
    June 25, 2012

    I had a California state tax lien filed, due to the failure of turbotax to e-file a return from several years back. I re-filed the return and actually had a credit for the year in question. I received a letter from the CA state franchise tax board that they were ‘no longer investigating this matter’ but the lien is still on my public record, and subsequently affecting my credit reports. How do I remove this from my public record, and from my credit report? Whom should I contact?

  • SteveB
    July 4, 2012

    Excellent info. I have multiple years of back taxes rolled into a payment plan. Is there (as long as I keep my payments current) any possibility of having the Liens they did file before the payment plan withdrawn?

    Thank you

  • July 10, 2012

    Hi Steve. The IRS doesn’t go into whether or not their policy is retroactive BUT we’ve seen several examples of successful withdrawal applications for liens that were filed years before their new policy and were paid in full. I’d say go for it.

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