Qualify for a mortgage when you have had a federal tax lien

I recently learned of an interesting fact on federal tax liens and I wanted to share it. The IRS will remove a tax lien from a consumer’s credit report at the time that the tax lien is paid in full, according to John Ulzheimer (President of Consumer Education at Smartcredit.com).

Here is an excerpt from his article at kiplinger.com:

Tax lien withdrawals

The IRS will now formally withdraw a tax lien if, and only if, the taxpayer pays it in full or enters into an installment program that will eventually result in full payment. Once this has been accomplished the taxpayer must request that a withdrawal be filed, which can be done using IRS Form 12277 (Application for Withdrawal of Filed Form 668(y), Notice of Federal Tax Lien). The response you will get from the IRS will come via IRS form 10916(c) (Withdrawal of Filed Notice of Federal Tax Lien.) That form is your golden ticket.

The Consumer Data Industry Association (CDIA), which is the trade association of the credit reporting agencies, has gone on record and confirmed that all three of the major credit reporting agencies (Equifax, Experian and TransUnion) will remove IRS tax liens that have been withdrawn. Consumers can facilitate the removal of the tax lien from their credit reports by contacting the credit reporting agencies, disputing the lien, and providing a copy of the withdrawal form. Once the credit reporting agencies confirm withdrawal, they will delete the lien from your credit reports.

There are a few things to keep in mind if you have tax liens on your credit reports. First, liens are considered seriously derogatory by most credit scoring systems, including FICO, so the removal of the lien could result in a significant increase in your credit scores (assuming you don’t have other similarly negative items remaining). Also, the IRS policy doesn’t trickle down to the state level. That means if you have state tax liens on your credit reports, then you’re still subject to their brutal credit reporting rules.

You can read the entire article here:

http://www.kiplinger.com/columns/kiptips/archives/new-tax-lien-rules-benefit-credit-reports.html

 

This is great news for a consumer with federal tax debt looking to buy a home. It’s already required that a homeowner pay off any judgments or liens before purchasing a home in order to keep the debt off of the property title records. With these changes, the consumer can also submit an application to the IRS for a withdrawal so that their credit score is also improved.

To be clear, this is different than changing the lien to a “Satisfied” status on credit. Typically, a paid lien does report differently than an unsatisfied lien. The process discussed by Mr. Ulzheimer actually removes the account from a credit report all together – resulting in a credit score reflective of the lien never having existed.

 

Here is a link to the necessary form on the IRS website. Please note that the instructions are on the second page of the document.

http://www.irs.gov/pub/irs-pdf/f12277.pdf

To complete the form, you will need the following info:

  • Form 668(y) Serial Number
  • The office where the form 668(y) was recorded
  • Date the form 668(y) was filed

You can call the IRS Tax Lien office to obtain this information.  The phone number is 1-800-913-6050

The information contained within this website is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant.

Presentation of the information via the Internet is not intended to create, and receipt does not constitute, an accountant-client relationship. Internet subscribers, users and online readers are advised not to act upon this information without seeking the service of a professional accountant.

Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties under U.S. federal tax law.

UPDATE  7/18/2012

I had a client submit the above paperwork to an IRS Tax Advocate Office.  The clerk at this office suggested the client to submit it the paperwork with a cover letter explaining why they needed this processed quickly (explained it was needed to receive a mortgage in process).  It took less than 3 weeks for the client to receive a letter from the IRS stating that the notice of filing was removed!  To guarantee this has been removed from credit, we’re still submitting letters to the credit bureaus with copies of the  IRS documents to ensure the credit is updated quickly.

Here’s a link to the IRS advocate office locations:

http://www.irs.gov/advocate/content/0,,id=150972,00.html

Here’s a link to a credit dispute letter template you can use to send to the credit bureaus.  I would recommend sending this letter via certified mail to the credit bureaus with the IRS documents once received:

http://www.creditdisputelettertemplates.com/initial/

 

Leave a Reply

  

  

  

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>