Can a Tax Lien Hurt Your Credit Score?

Are you having a rough time paying your back tax? Did you know that the IRS has programs that can help ease this burden? The situation would not feel as dire if you knew what your options are.

The IRS Fresh Start program is an initiative that has been put in place to make back tax payments easier on taxpayers. If paying tax feels like an over-complicated test you've not studied for, this article is for you. We will address how tax lien affects your credit score and what requirements you need to fulfill to apply for the IRS debt forgiveness.

Let's dive in!


Since the introduction of the IRS Fresh Start program in 2017, the IRS only files a Notice of Federal Tax Lien for tax payers with debts over $10,000.

Many taxpayers who owe more federal income tax than they can comfortably pay try their luck with IRS debt forgiveness.

IRS Fresh Start Basics

The IRS Fresh Start initiative made distinct changes that would ensure back tax victims have an easy time clearing their debt. These tax laws focus on installment agreements, tax liens, payment plans, and offers in compromise (OIC).

In simple terms, a tax lien is the government's legal claim to taxpayer's property when they fail to pay or neglect their back tax. To avoid falling victim to tax liens, you can use installment agreements to pay off your taxes over a set period.

Aside from these payment plans, you can also apply for an offer in compromise so that you pay a fraction of your owed back tax. Other options to consider include regular monthly payments and lump-sum payments.

Do Tax Liens Show Up on a Credit Report?

Before 2017, Tax Liens used to be on taxpayer's credit reports, and the three national credit bureaus, Equifax, TransUnion, and Experian, were in charge of maintaining them.

Regardless of whether you paid or not, a Tax Lien will remain on your credit report for up to seven years. Unpaid liens remained on taxpayer's reports for up to 10 years.

In 2017, the three credit bureaus put in place changes that eliminated all civil judgment records. By 2018, the credit bureaus had successfully removed all tax liens from taxpayers' credit reports.

The reason tax liens were eliminated was because most of them were linked to the wrong people. Since people tend to share first or last names, credit score reports got mixed up more often than not.

Does a Tax Lien Affect My Credit Score?

Since the introduction of the IRS Fresh Start program in 2017, the IRS only files a Notice of Federal Tax Lien for tax payers with debts over $10,000. This is a significant change from the initial $5,000 threshold.

This allows you to avoid lien and keep your credit score high. You can also avoid Tax Lien altogether or have it withdrawn. If you agree to set up a streamlined installment agreement with your direct debit, you will not get a Federal Tax Lien.

Before the changes that come with the Fresh Start initiative, you would get a Tax Lien if you owed the IRS $25,000 or more in back tax. Now, you don't get a Tax Lien unless you owe over $50,000 in back tax.

Do you need the IRS to withdraw a Notice of Federal Tax Lien that's already on file? Here are the conditions to meet;

  • Owe less than $25,000
  • Establish an installment agreement to clear this balance within 60 months
  • Must not have defaulted another agreement with the IRS within the last one year
  • Apply for the Withdraw of tax Lien once you've successfully completed three payments

What to Know About IRS Debt Forgiveness

Many taxpayers who owe more federal income tax than they can comfortably pay try their luck with IRS debt forgiveness. But does the IRS forgive taxpayers of their owed back tax? How does IRS debt forgiveness work?

Well, to increase your chances of success, you need first to understand how it all works. Usually, creditors are more likely to forgive a debt if it's a credit card balance or a student loan. However, the IRS is not a creditor, so this is not how they go about back tax payments.

The closest you can get to debt forgiveness from the IRS is if you get an offer in compromise. This is way better than a payment plan or installments because it's easier on your finances.

Here Is How Offers in Compromise Work

The first thing to understand is, not every taxpayer who applies for an offer in compromise qualifies. In fact, the chances of getting one are quite slim because the qualification criteria are strict.

The IRS considers the following before deciding if you're deserving of the offer;

  • Doubt as to liability

This, in simple terms, is a genuine dispute as to how much you owe the IRS in back tax. In some instances, one might not even be owing anything.

  • Doubt as to collectability

If the IRS determines that income and assets are less than your full tax liability amount, then you're likely to qualify for an offer in compromise. In other words, the IRS settles for a percentage of what you owe in back tax because they believe the full amount may not be collectible.

  • Effective tax administration

In this instance, there is no doubt as to how much you owe, but a collection of the full amount you owe in back tax would create a financial hardship. There are exceptional instances where a collection of the full amount would be viewed as inequitable and unfair.

Other requirements you need to meet include;

  • You must have cleared filing all your tax returns
  • You should include at least one received bill for your owed back tax in the application
  • You need to have made all the required tax payments for the current tax year
  • As a business owner with employees, you need to have deposited all the required federal tax payments for the current quarter
  • You or your business should not be part of any ongoing bankruptcy proceedings
  • You should ensure you don't have an outstanding innocent-spouse claim or an open audit with the IRS
  • The IRS shouldn't have already referred your case to the Department of Justice

Offer in Compromise Payment Options

  • Lump-Sum Cash Offer

Once you get an offer in compromise, you can choose to pay the agreed-upon amount in a lump-sum. A lump-sum cash offer is payable in five or fewer installments. It means you have a total of five months to complete the payment.

  • Periodic Payment Offer

As the name suggests, a periodic payment offer is one that you pay over a set period. According to the tax laws, taxpayers can pay their owed back tax within six or more months based on the agreement.

You are to complete your payment within 24 months after your offer in compromise is accepted.

Wrapping Up

The IRS Fresh Start initiative allows you to have an easy time paying your taxes on time. As a taxpayer, you should find out what your options are if you're unable to make full tax payments. The provisions by the IRS ensures that you paying tax does not result in financial hardship.