Credit Bureaus Shown the Door on Tax Liens and Civil Judgments
The Fair Credit Reporting Act, 15 U.S.C. § 1681 (FCRA), requires credit reporting agencies to "follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates." An investigation by the Consumer Financial Protection Bureau (CFPB) found that Experian, Equifax, and TransUnion, often referred to as the Big 3 of credit reporting, did not conduct reasonable investigations when consumers disputed a civil judgment or tax lien in their credit profile. This finding brought about a need for greater scrutiny by the credit reporting agencies to remain in compliance with the FCRA. Over the past year, credit reporting agencies have attempted to comply with the FCRA but found it too costly. Beginning April 2018, they have begun abandoning the reporting of civil judgments and tax liens.
While this change will not directly impact business credit profiles, small business owners who rely on their personal credit to meet the needs of their business are likely to see a benefit. Individuals previously impacted by a tax lien resulting from a personal tax liability or by a business tax matter through a responsible person assessment will no longer see the lien reported on their major credit bureau profiles.
What effect will this have?
The jury is still out on whether this will have much of an impact on an individual’s credit profile. A February 2018 study by the CFPB found that this change had minimal impact on the credit profiles affected by tax liens and civil judgments. The report noted that the average credit score for those with liens or judgments was 577, well below the score of 620 typically used to set the subprime threshold. It also noted that of those with liens and judgments in the subprime category — referring to the credit quality of particular borrowers who have weakened credit histories and a greater risk of loan default than prime borrowers — approximately 10 percent rose to near the prime level as a result of the removals. Ultimately, you may notice a slight uptick in your credit score if a civil judgment or lien was previously on your credit report and is subsequently removed.
Tax lien still causing problems?
Even if the tax lien is not being reported on an individual's credit report, the lien is still present and can be discovered by lenders. There are three specific ways to address a tax lien if it is still causing problems for a business or individual: withdrawal, subordination, or discharge.
Form 12277 must be filed with the IRS in order to request a tax lien be withdrawn and no longer reported anywhere. While anyone can file for a lien withdrawal, the filing begins a formal review process that can seem adversarial. After all the IRS deemed the lien to be appropriate at one time so the application is based a need to change that decision. Often this is best handled by a licensed tax professional who can more thoroughly explain the reasoning behind the request. David Miles, Enrolled Agent and Vice President of 20/20 Tax Resolution says, "The key to a successful lien withdrawal is tailoring the application for the withdrawal to a justifiable request, such as submission in conjunction with a direct debit installment agreement or that it is in the government’s best interests to withdraw the lien."
Additionally, tax liens can be subordinated or discharged from specific property. A subordination can be effective in cases where a bank is willing to lend against an asset provided the IRS take second position, also known as a junior lien position, whereas it would traditionally hold the first position. A discharge can be required in cases where assets need to be liquidated to meet business obligations including repayment of tax debt and allows the assets to be sold free and clear of the tax lien. A subordination requires the filing of Form 14134 and a discharge requires the filing of Form 14135.
As a result of the recent changes small business owners encumbered by a tax lien or judgement should take this as an opportunity to reevaluate their credit. They may find an improved FICO score without even taking action, but for those requiring a more comprehensive solution to a tax lien, consider sitting down with an experienced tax practitioner.