You’ve probably heard that the IRS will now make it easier for delinquent taxpayers to have tax lien records completely removed from credit bureau files. The taxpayers need to pay their overdue tax bill in full or simply agree to a direct-deposit arrangement for paying the overdue tax. So instead of the IRS changing the status of the tax lien to “paid” and leaving it on the credit report for another seven years, the IRS will simply remove all evidence that the tax lien ever occurred.
When I first heard this news I wondered why the IRS would be nice to scofflaws. Well, it wants to motivate them to pay their overdue tax bills. In so doing, the IRS is treating the “paid tax lien” entry on consumer credit reports as merely a kind of punishment for badly behaved taxpayers. Withhold the punishment, their logic goes, and taxpayers will behave better.
But the IRS decision has unintended consequences. Every serious delinquency on a credit report is predictive of credit risk. Tax liens are especially predictive of credit risk whether or not the taxpayer eventually made good on the debt. That’s why Congress has long allowed records of paid tax liens to remain on credit reports for seven years. FICO has always factored the predictive value of paid tax liens into our FICO® credit scoring models.
So the IRS change bothers me. By removing all record of a paid tax lien, the IRS will restrict the ability of lenders to objectively evaluate and manage that consumer’s credit risk. By essentially playing politics with the nation’s credit reporting system, the IRS is flicking gravel into the gears of our consumer economy.
It’s ironic that other nations hold up the full-file reporting in the US as the model they most envy and want to emulate. As a case in point, Australia and Brazil are moving from negative-only reporting systems to systems that include positive credit data. Yet the US government is pushing our credit reporting system toward more restrictive reporting.
Full-file reporting in the US has helped bring consumers the quickest and easiest access to credit in the world, selecting from the richest variety of credit products and shopping from the largest number of creditors, regardless of the person’s race, ethnicity, gender or age. Such advantages are due in large part to the ability of US lenders to quickly and objectively assess the credit risk of individuals based on a detailed history of their credit behavior, both good and bad.
When the IRS withdraws records of paid tax liens, it effectively changes consumers’ credit history to the detriment of businesses that rely on that information to manage their credit risk. Government should protect our nation’s credit reporting infrastructure, not erode it.
