Tax liens can be a complicated issue, but thanks to recent changes, tax liens can sometimes be withdrawn from your credit report. A tax lien gives the IRS a legal claim to a taxpayer’s property for the amount of an unpaid tax debt. A lien is a public record. Unpaid liens will stay on your credit report for 15 years and paid liens for 7 years. Until recently they have been very difficult to remove from your credit report.
In 2011, the IRS made some modifications to its procedures regarding tax liens and has made it easier for taxpayers to obtain lien withdrawals. Liens will be withdrawn once the taxes are paid in full. A lien that is withdrawn is treated as if it had not been filed and can be removed from the taxpayer’s credit record. The IRS will also withdraw a lien if the taxpayer signs up for direct debit billing. The lien can then be withdrawn once it is clear the payments are going through. The taxpayer must request the withdrawal using Tax Form 12277. The taxpayer can then contact the three credit bureaus (Experian, Equifax and Transunion), dispute the lien and provide a copy of the withdrawal form. Unfortunately this new policy only applies to the IRS and doesn't include taxes that are due at the state level.
The new policy doesn't apply to “offers in compromise” or settlements. A settlement occurs when the taxpayer and IRS compromise a deal for less than what the taxpayer actually owes. Because a settlement doesn’t result in a full payment to the IRS, the lien will simply be “released”. Credit bureaus do not remove released tax liens until 7 years have passed from the release date.
Tax liens are the only negative item that can be removed because of payment. Other debts do not have this flexibility such as collections, repossessions, foreclosures, defaulted credit cards or medical bills.