Dealing with tax problems is stressful enough. But it can be downright maddening to discover that your credit has been damaged over a tax bill you had nothing to do with. A Credit.com blog reader asked:
My wife’s credit report shows a tax lien from my taxes from before we were married. Is that legal?
Probably not, says Dan Pilla, the founder of TaxHelpOnline.com. In most cases, if the tax lien was filed against the husband, not the wife, then his wife’s “credit report should not show the lien,” he says. If they live in a community property state, though, the answer may be different. More on that in a moment.
First, a brief explanation of how tax debt affects your credit is in order. Tax debt isn’t usually reported on credit reports unless the Internal Revenue Service files a Notice of Federal Tax Lien. The IRS files tax liens to protect its interest in the property of someone who can’t or won’t pay the taxes they owe. Liens may be automatically filed for unpaid tax debts totaling $10,000 or more, and may sometimes be filed for smaller debts. (That limit used to be $5,000, so some consumers’ credit reports may show older liens for smaller amounts as well.) Tax liens may be reported for seven years from the date they were assessed if they have been paid, or indefinitely if they are unpaid. They severely damage consumers’ credit scores.
It’s also worth noting that spouses have separate credit reports and the only time one partner’s credit or tax problems should affect the other person’s reports is when they share accounts (for example, joint loans or credit cards, or when one is an authorized user on the other’s accounts).
Community Property States
However, it does get tricky in the case of community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — which establish joint property rights. “It gets complicated because each spouse has a vested half interest in the other’s property regardless of how it is titled,” says Pilla. He gives this example:
Parties get married on Day 1. On Day 2, she buys a house in her name. Even if it is titled in her name only, it’s a community property asset which gives her husband half interest. The IRS can file a tax lien and it will attach only to the husband’s interest.
In the case of this reader’s question, “If they are in a community property state, then it becomes questionable, as the lien would only attach to community assets acquired after the marriage,” he says. In other words, if this reader lives in a community property state, his wife may want to investigate further to see whether the tax lien listed on her reports is a mistake.
How to Protect Yourself
What can you do to protect yourself from a tax lien on your credit report due to your spouse’s tax problems?
- If one of you expects to owe a large tax debt due to an action triggered by an issue that doesn’t involve the other (for example, he gets a 1099-C for a large amount of canceled student loan debt, or she sells stock she held in her name only and triggers a large capital gain), consult a tax professional to determine whether filing separately makes more sense. If you file a joint return, the amount you owe as a result will be a joint responsibility.
- If you already have a tax lien filed against your property due to your spouse’s tax problems, talk with a tax professional to find out whether it makes sense to attempt to file for Innocent Spouse Relief.
- If you, your spouse, or the two of you together owe a large tax debt you can’t pay, consider an installment plan with the IRS. You may be able to request the lien be removed if your payments are made on time for several months under one of these plans.
- Get your free annual credit reports at least once a year to see whether a tax lien or other serious negative information appears on your credit reports. In addition, it’s a good idea to get your credit scores, which you can do for free at Credit.com; a drop in your scores could indicate negative information has been added to your reports.
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