Good News: Your Tax Lien Is About to Come Off Your Credit Report

May 15, 2018 | By: Kari Brummond, EA

credit bureaus are removing tax liensIf you’ve got delinquent taxes, goods news is on the horizon. The credit bureaus are removing tax liens from credit reports (CRs). That instantly improves your credit report, potentially boosting your score and making it easier to obtain credit. Here’s a look at the details.

What Are the Credit Bureaus Removing?

Last July, the credit reporting bureaus decided to remove all tax liens and civil liabilities if the reports didn’t include the name, address, social security number, and birthdate of the consumer. Additionally, the bureaus also announced that they were only going to include liens that were updated every 90 days.

Due to those increased standards, the credit bureaus have removed half of the liens and 96 percent of civil judgments. The credit bureaus plan to take down the rest of the tax liens this month. According to American Banker, that’s 5.5 million records.

Why Are the Credit Bureaus Removing Tax Liens?

The decision to remove liens is part of an industry-wide effort to increase the accuracy of consumer credit reports. According to the Federal Trade Commission, 26 percent of people have errors on their credit reports. As approximately 200 million Americans have credit reports, that means mistakes are on 50 million credit reports. Luckily, however, only about 2.2 percent of credit reports have errors that drastically reduce the consumer’s credit score.

Unfortunately, even when consumers complain about these errors, the reporting bureaus are notorious for not fixing them. In fact, the Consumer Financial Protection Bureau has received 185,700 complaints in the last five years, and most of those concerns are related to the bureaus’ refusal to investigate and remove erroneous reports.

Additionally, an enforcement settlement between the credit reporting bureaus and more than 30 state attorney generals influenced the shift. In 2012, a group of state attorney generals launched an investigation on the credit reporting bureaus. Ultimately, they found that the bureaus were not taking reasonable steps to ensure accuracy or investigate disputes. The bureaus were also failing to prevent redacted files from reappearing on consumer reports. Although the bureaus maintained their innocence, they agreed to a $6 million settlement in 2015. Furthermore, they also committed to changing parts of the reporting process.

Are There Side Effects to Lien Removal?

FICO speculates that 700,000 consumers will see a 40 point boost to their credit scores, due to removing tax liens and judgments. Approximately, 11 million people will see improvements of 20 points or less.

In some cases, the increased scores may help consumers to obtain loans more easily. But there’s a risk that lenders may lose confidence in some aspects of the credit reporting process. Ergo, they may tighten borrowing guidelines. However, some claim that risk is overstated, especially as the lending industry is starting to move away from traditional credit reports. Many fintech companies, for instance, are moving away from everyday credit scores and metrics. In fact, many fintech companies find different ways to judge creditworthiness.

What Are The Repercussions of These Changes

With an IRS tax lien or a state tax lien losing its effectiveness, we expect the IRS and States to issue more wage garnishments and bank levies for unpaid taxes instead. Why will the IRS and various states issue tax liens if the enforcement action does not affect a delinquent taxpayer’s credit report from the three major credit agencies?

Who’s Affected?

The credit bureau changes will affect between 6 and 11 percent of consumers. If you have a tax lien on your credit report, you are part of that group. Primarily, this affects consumers with subprime credit scores below 620. If you’re in that category, the slight increase in your score may be just enough to boost your score into the fair to good range.

Getting tax liens off your credit report is an essential first step, but ultimately, if you want to protect your financial health, avoid wage garnishments, and prevent the seizure of your assets, you need to make arrangements with the IRS. To learn about payment plans, settlements, and other options, contact us today. We can understand the challenges of your situation.