When tax liens, bankruptcies and judgments appear on credit reports, they can prevent sureties from issuing bonds and banks from granting loans. This can be devastating for construction companies that need both to succeed.
Are there ways to get the tax lien off the credit report? Yes! Let’s find out how.
According to the government: “A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.”
For surety bond underwriters, the tax lien is a red flag for a number of reasons:
- It can mean the bond applicant had insufficient cash flow to meet their financial obligations.
- It may be a sign of poor management or weak internal controls.
- The scariest part may be the “weapons” used by the IRS to collect their tax money. They can issue a tax levy. This permits the legal seizure of property to satisfy the tax debt. They can garnish wages and take money from a bank or other financial account. They also have the ability to seize and sell vehicles, real estate and personal property. These collection activities can threaten the success of bonded projects to the detriment of the contractor and surety. Bad for everyone except the IRS agent.
Here is how to remove tax liens from the credit report:
- Wait. Eventually the credit bureau may drop it from the report even if it is not paid, but this can take years.
- Pay the tax bill. Eliminating the debt will not remove the lien from the credit report, but will show it as “released.” For credit grantors, this is still negative, but less threatening. Paid liens remain on the report for seven years. So the next step is also needed…
- Federal form 12277. With this document you can ask the IRS to withdraw (remove) the lien notice, even when the debt is not paid off!
More about form 12277
This is part of the federal “Fresh Start” program, which provides certain benefits to taxpayers. 12277 is the Application for Withdrawal form. The IRS will consider withdrawing the lien notice if the debt is being paid through a Direct Deposit installment agreement, plus a few other conditions.
The purpose of the Application for Withdrawal is not to eliminate the lien, but to remove it from public view when there is no longer the threat of a tax levy. Consider using this procedure on liens that are not paid off, and those that are!
In both cases it is legal and beneficial to have the lien disappear. But is this practice unfair or deceptive? No, because banks and bonding companies have other ways of detecting the lien. They are not being deprived of relevant information. For example, the debt will appear in the financial statements and also on the Contractor Questionnaire.
One more comment about the dreaded, draconian tax levy: Before the IRS proceeds with the levy they are required to send the taxpayer a Final Notice of Intent to Levy and Notice of Your Right to A Hearing. This gives the taxpayer one last chance to argue against the levy before it is implemented. Go for it. Maybe it will help. Remember – they’re from the government and they’re here to help!
Now you know the ways to remove a federal tax lien from view. By waiting, paying and / or using form 12277, the lien can be wiped from the credit report. For the taxpayer, it can be an important step toward financial recovery.
Please note: We are not attorneys and are not intending to give legal advice. For that, call your attorney. If you need a surety bond, call us!