Got Unpaid Taxes? Here's How Your Credit Might Be Affected by Them

Unpaid taxes can lead to tax liens, which may end up on your credit reports

1040 Tax Return Forms / Got Unpaid Taxes? Here's How Your Credit Might Be Affected by Them
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February 28, 2017

Once again, we're in the middle of tax season. If you're expecting a refund, you may have looked forward to this time of year; if not, you may have dreaded it. If you owe, you need to know that trying to run from the problem by not paying can have many unpleasant consequences, including affecting your credit.

Tax Liens and Your Credit Reports

If you don't pay your taxes, the IRS will not report the debt to the credit bureaus. Don't get too excited, though; just because your state's tax authority or the IRS doesn't report the debt, it doesn't mean that tax liens won't find their way onto your credit reports in another way.

The fact that these tax authorities do not report tax liens to credit bureaus makes the liens different from other negative items on your credit reports. The three major credit bureaus—Equifax, TransUnion, and Experian—don't need them to report unpaid taxes; they simply look for information in public records.

How Long Can a Tax Lien Stay on a Credit Report?

Most negative items on your credit report have an expiration date due to the Fair Credit Reporting Act (FCRA). This law strictly and clearly limits the amount of time such information is allowed to stay on consumers' credit reports.

Unpaid tax liens are an exception. The FCRA does not require unpaid tax liens to ever be taken off your credit reports, no matter how old they are.

Paid tax liens—known as "released" liens—are another matter. These are allowed to remain on your credit reports for up to seven years after the date they are paid (released). Unfortunately, they can damage your credit scores during all of those seven years.

Withdrawn Liens

Fortunately, the IRS has several consumer-friendly policies—collectively known as the Fresh Start Program—that provide an opportunity for consumers to get certain federal tax liens taken off their credit reports much faster than seven years.

Under this program, taxpayers whose liens are eligible can apply to have them withdrawn under one of two circumstances. The first is available to those who pay their outstanding liens in full; the second is when a taxpayer enters an approved automatic payment plan with the IRS and has made at least three consecutive payments. As a matter of policy, the credit bureaus will remove withdrawn liens.

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