Back taxes will compound penalties, fees, and interest, but they can also negatively affect your credit score. Next to bankruptcy and judgments, tax liens are one of the worst negative public records that can show up on your credit report. A tax lien is the government’s legal claim to your property. After long periods of time of not responding to IRS notices for payment, a tax lien can be assessed and it will show up on your credit report. This is a big issue for many reasons. It can reduce your credit score by up to 100 points and tarnish your overall credit rating. Tax liens can remain active for 15 years, and even after settling the tax debt, the lien typically persists for another 7 years – emphasizing the importance of avoiding them.
If you have back taxes due, it’s advisable to clear as much of it as you can before the IRS places a tax lien. If settling the full amount at once is not feasible, then arranging an alternative payment plan with the IRS is the next best step to prevent a tax lien. There are two main options for payment plans:
∙ An installment agreement lets you address your tax debt over time through a structured payment plan.
∙ An offer in compromise is a negotiated settlement for a sum less than what you owe, but specific criteria need to be met for this option.
After opting for a payment plan, it’s beneficial to boost your income and cut down your expenses. These strategies free up cash flow and help in diligently addressing your tax obligations. This proactive approach is crucial, especially if a lien hasn’t been issued yet.
If, however, a lien is already in place, the priority should be to clear the tax debt promptly. Remember, the lien will be reflected on your credit report for 7 years from the date the tax debt is squared off.
If settling the tax debt will take an extended period, and you aim to remove the lien from a particular asset, consider applying for a discharge certificate. While it won’t erase the lien, it permits you to lift the lien from the specified asset.
Another avenue is the withdrawal option. A withdrawal deletes the public tax lien notice, implying the IRS won’t compete with other creditors for your assets, though the tax debt remains in full.
Regardless of your decision, maintaining open communication with the IRS is paramount. The IRS is generally amenable to accommodating individual situations, ensuring a win-win for both sides. What they won’t appreciate is negligence towards their notices or a sheer reluctance to clear tax dues. Hence, proactive action is crucial when dealing with back taxes.
Whether you’re facing a lien or grappling with back taxes, consulting a tax professional is wise. Purple Pig has the expertise and resources to guide you through these challenges. Reach out to us today.
