If you are dealing with a tax lien, you should know that your credit score can eventually be affected if you're not careful. Tax liens are often the largest debt that a consumer faces, so they can significantly lower a consumer's credit score until they are cleared up.
The following are four things you should know about tax liens and your credit score to protect your financial health while dealing with your tax liability:
Initially, the IRS is unlikely to report a tax lien or tax liabilities to the credit bureaus.
Any tax liability you have is not going to affect your credit score until a tax lien is placed on you. You will know when a tax lien has been placed on you, because you should receive a Notice of Federal Tax Lien from the IRS.
A tax lien lets creditors know that you owe the IRS and that the IRS has had to pursue you in court in order to recover funds that you owe them.
If you are able to work out a payment plan with the IRS before the tax lien is placed, your tax liability should not impact your credit.
It's definitely in your best interest to work out a payment plan if possible. Don't neglect correspondence from the IRS.
Being put on a payment plan will prevent a tax lien from being placed. The IRS is generally very willing to work with taxpayers to find a solution, so getting an extension or being put on a payment plan is usually a fairly simple matter.
The best advice is to communicate with the IRS rather than ignoring them. This is even true if you know you can't pay off your tax debt right away.
Even after a tax lien is paid off, it can remain on a consumer's credit report for some time afterwards.
Once you've had a tax lien placed on you, you should be aware of the fact that the consequences can be long lasting. Even after you've paid off your tax debt, your tax lien will remain on your report for a certain period of time.
Typically, you can expect your tax lien to stay on your credit report for seven years after it's been paid off.
If possible, a personal loan or a credit card might be a good way to handle your tax lien and avoid having it reported to the IRS.
It's best to avoid a tax lien. If you have a line of credit available to you or a personal loan, you should definitely take it out to pay off your tax debt before a lien is placed. Although you'll have to pay the interest on the loan, you'll avoid a significant hit to your credit by avoiding the tax lien.