Does Paying Off a Tax Lien Increase a Credit Score?

Although a tax lien is one of the most damaging items in any person's credit history, it is also one of the easiest to counteract. If you can pay off the tax lien, you may be able to get the IRS to withdraw it from your credit history within days. However, this is not a perk that applies to all tax liens, so you should avoid them in the first place.

Identification

Paying a tax lien does little to improve your score other than removing some debt from your credit history. However, unpaid tax liens can stay on your credit history indefinitely unless the credit reporting bureau or state law limits the reporting time limit. Only a few states and agencies deviate from federal reporting standards. At the time of publication, Experian reports unpaid tax liens for 15 years, and California only allows bureaus to report unpaid tax liens for 10 years. Federal law limits the reporting time period for paid tax liens to seven years. Paid tax liens become less important as they age, so the sooner you pay a lien, the sooner your credit score recovers. Any tax lien can take over 100 points off of your score, according to Jeanine Skowronski of the financial website Mainstreet.

Withdrawing Tax Lien

In 2010, the IRS issued a new policy on tax lien withdrawals to motivate consumers to pay off their liens. In return for payment in full, the IRS will withdraw a tax lien from the public record -- making it non-reportable to the national credit bureaus. The IRS filed 1.1 million liens in 2010, so this regulation could drastically improve the average credit rating in the U.S., according to Matthew Scott on the DailyFinance website.

State and Local Liens

IRS rules on withdrawing a paid tax lien do not apply to state and local liens. Paying a state and local lien only removes some debt from your credit profile, unless the taxing authority also has a program that lets you eliminate a tax lien from the record. Also, tax liens in general are dangerous to your financial health because the taxing authority might use aggressive collection tactics, such as levying your bank account.

Tips

If you want the IRS to withdraw a lien, you can only do so by filing Form 12277. Also, pay your tax lien in full. The IRS probably will not withdraw your lien if you negotiate a compromise that results in you paying less than the total amount due. In the future, contact the taxing authority before it has forced payment by filing a lien. Most agencies offer automatic extensions on paying your tax bill.