However, a tax lien is said to be a legal claim of one’s property and assets by the government when he or she does not pay some taxes. Thus, it includes real property, personal property, and financial assets. The IRS has put into place tax liens in order to ensure the payment of overdue taxes. They do not affect credit scores anymore but can cause other kinds of financial problems in your life.
How a tax lien affects your credit
1. Your current credit report and score will receive tax liens since the tax liens are no longer items of credit reports from major credit-reporting agencies such as Experian or Equifax since 2017.
2. Access to credit and loans
Although tax liens will not make it to the credit report, many lenders will still view them in prudence as a risk. Therefore, the tax lien will usually be dubious in qualifying the tax lienholder for loans, credit cards, and higher credit lines.
3. Attach them to the tax lien
These are attached to your assets, such as real estate, vehicles, and bank accounts. You will be able to sell or refinance the assets only when you have resolved the lien.
4. Commercial consequences
Plus, tax liens can apply to business owners. Therefore, the flow of business finances is sometimes disrupted, thus hindering business operations.
5. Complications of Bankruptcy
Once a lien is placed on your tax return, it may still remain when you file for bankruptcy. Tax debt associated with a lien typically needs to be paid; it is not like those that can be discharged as the others related with the bankruptcy.
Checking if you have a tax lien
Tax liens are classified as encumbrances; an IRS tax lien is the government placing an encumbrance on your estate because you have not paid taxes due. The IRS must notify you of its intention to place this lien, stating a payment is due. The taxing authority may also provide a notice called Notice of Federal Tax Lien, which will qualify as a public document. Contacting your local courthouse or tax authorities will further clarify any lien placed on your estate.
Other liens that affect your credit
Tax liens are just one of many statutory liens that can affect your financial status. Some others are:
- Mechanics lien – For unpaid labor provided on your estate.
- Landlord lien – For unpaid rent.
- HOA liens – For unpaid HOA dues.
Steps to avoid a tax lien
1. Timely tax collection
The best way to avoid a tax lien is to pay taxes as they become due. If you foresee trouble paying your tax due, consider negotiating a payment arrangement with the IRS.
2. Payment plan
If you cannot pay the full amount owed, you are allowed to enter into IRS installment agreements to gradually pay off the amounts owed.
3. Settlement negotiation examples
Your tax debt may be forgiven for less than the full amount owed by entering an Offer in Compromise.
4. Be financially vigilant
Keeping close track of how much you owe in taxes, including regular savings for tax payments, can ease financial burdens, therefore lowering the risk of a tax lien.
