One of the most damaging credit score killers are unpaid tax liens. Unpaid tax liens can damage your score for years to come and will continue to cause damage even after they are “released” or paid. An unpaid tax lien can remain on your credit file indefinitely per the Fair Credit Reporting Act (“FCRA”).
A new policy proposed by the Internal Revenue Service (“IRS”) suggests a trend toward removing paid tax liens from consumer reports. Even after payment, a tax lien will continue to be reported on your credit file and can do just as much damage to your credit score as it did prior to payment. This new policy proposes that after full payment of your lien, it should be removed from your report earlier than the statutory seven year reporting period, confirmed by all three major credit bureaus, Equifax, Experian and Trans Union. The purpose of this policy is to aid consumers who make the effort to pay off debts. This policy will allow responsible consumers to clean up their credit report and begin rebuilding their credit after repayment.
While I discussed in previous posts proposed amendments to the FCRA regarding removal of paid medical debt, currently, paid tax liens are the only items that would be removed from your report after payment in full. This deletion however, is the type of conduct the credit reporting industry looks down on, as your history of timely payment should be accurately indicated on your report and ordering a deletion of an account you were delinquent on does not accurately reflect your ability to pay.
It is important to note that this policy only applies to tax liens paid off in full. So if you cannot afford to make a complete payment and you settle the lien for less than the full balance, the tradeline will still be reported on your credit file as “released” and will continue to be reported for seven years from the date it was settled. Further, the IRS states that it is the responsibility of the consumer to request a deletion of the tradeline. If you make full payment of your tax lien, you must write to the credit reporting agencies, similar to launching an investigation into an inaccuracy on your credit file, and request a deletion of the tradeline due to payment in full. Providing proof of payment is highly recommended, to avoid the hassle of drafting multiple letters.