Westchester County Home News: IRS Introduces New Policy for Removal of Tax Liens on Credit Reports

Tax liens whether paid or open can have a devastating effect on credit scores especially when they are newly posted on the credit reports. Many consumers going through the mortgage approval process have found great difficulty in obtaining funding due to the reduction in scores caused by tax liens. The IRS, with this in mind, has recently made a wise decision giving consumers incentive to pay overdue tax debt in full.

In February of 2011 the IRS put out a press release describing a new policy that will give consumers who have open tax liens the ability to have negative public records on their credit profiles removed. The IRS is expecting to collect more money from debtors by trying out this positive method. The new program gives consumers a chance to rehabilitate credit when they either pay tax liens in full or enter into a payment plan that will end in payment in full. Not all will qualify for this option, only those owing less than $25,000.

Since credit scores are highly affected by the timing of negative information, if a new negative account (including a tax lien) is updated on a credit report the Fico Score could drop over 100 points. This is a major problem when applying for financing of any kind, especially in today's restrictive banking environment. The higher a Fico credit score the more the impact of a derogatory will reduce a score. As time goes by the score starts to increase but it could take well over 2-3 years to really see major recovery. Even paying a tax lien, judgment, or getting current on an individual account that has been late will not take away the impact of the initial negative mark. For many, the cost of paying in full to the IRS rather than a higher monthly mortgage payment, over many decades will be the better choice.

The cleansing of the credit reports is not an automatic response to payment. Consumers must request the withdrawal before making payment in full or entering into a payment plan. Once the IRS files a withdrawal the credit bureaus will then clear the lien from the credit profile. Not all consumers will qualify for this opportunity and CPA's must educate their clients before making payment or they will miss out on this opportunity. Having this knowledge to pass on to clients can equal enormous savings on future money borrowed.

The IRS has also raised the minimal amount of tax debt that prompts the filing of a tax lien from $5,000 to $10,000.