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While a federal tax lien can be avoided by communicating with the IRS once you start receiving notices, there are circumstances where sometimes you just can’t avoid it. It happens, but what is important is to know how to deal with it. A federal tax lien can have many consequences on your finances, and it is important for you to know just how you’ll be affected. How Long Does a Tax Lien Last?
Liens are tricky to get rid of, especially since no matter how responsive you are to its appearance in your credit report, it won’t go away as soon as you pay. A federal tax lien is placed on your account because you failed to pay income taxes. It is not a levy, which is another word for repossession, but rather an insurance policy for whatever stake the government has on your property. While you can choose to make payment plans to pay off a lien, it will not go away until you fully pay off the appropriate debt. Here’s a quick tip on how to save on taxes: pay off your tax lien. The problem is this doesn’t immediately free you. Once the debt is paid off, the lien should be removed from your name within the next 30 days; however, it will not be removed from your credit report for another seven years. So, if the payment to clear a lien applied in 2008 was processed in 2011, you’d still have that black mark on your credit report until 2018. So don’t trick yourself into thinking it disappears with your last payment check. The best way to keep from suffering the consequences of a tax lien is to avoid ever getting one. If you get notices from the IRS, don’t ignore them. Contact the IRS and let them be aware that you are making a diligent effort to pay back your debt. In response, they will help you plan out a payment plan and keep a lien off your file. How it will affect you A federal tax lien will affect you on several levels, but the circumstances of your lien determine what affects your credit score. First, the lien will be attached to all of your assets, including properties and vehicles and maybe even securities. The lien will also be attached to any future property you buy while the lien is on your record. How does a tax lien affect your credit score? It’ll start by greatly diminishing your credit score, and as stated before, it will stay on your credit report for seven years upon repaying the debt in full. With this on your record, you will find it harder to take out large lines of credit, and interest rates on any credit you do receive will be much higher, costing you thousands of dollars more than usual. If you are a business owner, the lien will be applied to all business property as well as any rights involving business property you may have, among which can be accounts receivable. A lien will affect every aspect of your financial life, so it’s best to be proactive about your notices from the IRS and keep a lien off your record. How to get rid of a lien If a lien is put on your record, the only way to get rid of it is to pay it in full. Once you pay back the debt that the lien was applied for, then the lien will disappear from your assets. However, remember that the lien will stay on your credit report for an additional seven years after you make that final payment. Bankruptcy is not an option, in this case. If you file for bankruptcy, barring exceptional circumstances, your lien and tax debt will follow you. If a tax lien is put on your credit report, it becomes incredibly important to monitor your credit scores. You will need to be vigilant to determine exactly what you need to do to keep your credit score from dipping more than it needs to, because every point dropped is potentially hundreds of dollars you can be losing in the long run. Amy Johnson is an active finance blogger who is fond of sharing interesting finance management tips to encourage people to manage their personal finances. More specifically, she advocates that people should check credit reports and scores regularly.
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