Consumer credit bureaus rely, in part, on public records to determine credit scores. This information is regularly collected from state and county courts. Those courts hold a wealth of information, including state, federal and local tax liens, as well as judgments, foreclosures and bankruptcies.
Tax Liens
Tax liens give a lien holder a legal right to claim a person's property. The IRS only files liens after they give a debtor notice of a tax liability and the debtor fails or refuses to pay within 10 days. A lien gives the lien holder a priority claim to property in bankruptcy or if the property is sold at auction. They're filed publicly to warn other creditors that there's a large, outstanding debt they're entitled to collect first. An IRS lien attaches to all of a debtor's property, including his house, car, and in business, accounts receivable.
Considerations
Tax liens are similar to bankruptcies. They stay on your credit report for seven years. According to the Fair Isaac Corporation (FICO), which is the company responsible for the most widely used credit scoring formula, "The presence of a public record (such as a bankruptcy or tax lien) and a serious delinquency are powerful predictors of future payment risk."
Misconceptions
Some people believe that a tax lien will be removed from a credit report after it's paid. This is false, according to FICO. "Satisfying the public record will not remove it from your credit report. The fact that it occurred is still predictive of future payment risk and will be considered by your FICO score."
Actions to Take
The best way to prevent a tax lien from impacting your credit score is to pay your taxes or enter a payment plan with the IRS before a lien is filed. Mistakes can happen, and tax liens are occasionally filed improperly. If this happens, the IRS will send you a tax certificate stating that the lien was in error. Mail a copy of the certificate to the three major credit reporting bureaus: TransUnion, Equifax and Experian.
Significance
Lenders like borrowers who pay back loans. Borrowers who do so are often given more favorable terms on car loans, mortgages and credit cards. A good credit score can save a borrower thousands in interest rate payments and other fees. If you have a tax lien and do not want to pay it, consider the idea that having a tax lien on your credit report may cost you more in future interest payments than it does in taxes.
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