What are Federal Tax Liens and How Do They Affect Your Credit and Property Transactions?

Quick overview

A federal tax lien is the IRS’s legal claim on a taxpayer’s property when tax debts go unpaid. The IRS files a Notice of Federal Tax Lien to alert creditors and interested parties that the government has a secured interest in the taxpayer’s assets. While the lien itself is separate from criminal penalties, it signals unresolved tax obligations and can interfere with credit, refinancing, and property sales (IRS — “Understanding a Federal Tax Lien”).

How liens are created and recorded

  • The IRS assesses taxes, sends a bill, and if the bill isn’t paid and other collection procedures (like a Final Notice) are followed, the IRS may file a Notice of Federal Tax Lien in public records. (IRS guidance)
  • Filing creates a public record. Title companies, lenders, and prospective buyers can find the lien during title and background searches.
  • The IRS may issue a Certificate of Release when the liability is satisfied, or issue subordination or withdrawal in limited situations.

How liens affect credit and lending decisions

  • Public record vs. credit report: Historically, tax liens have appeared in public records and sometimes on credit reports. Since reporting standards changed in 2017, not all tax liens appear on consumer credit reports, but they remain discoverable in public records and through title searches. Lenders and underwriters routinely check public records and will treat a filed federal tax lien as a serious negative when making credit decisions. (Consumer Financial Protection Bureau)
  • Practical effect: Even if the lien doesn’t lower a FICO score directly, it can cause loan denial, higher interest rates, or extra conditions from a lender because it signals an outstanding secured debt.

How liens affect property transactions

  • Title problems: A federal tax lien attaches to your real property and can prevent a clear transfer of title. Title companies often require liens to be satisfied or subordinated before issuing title insurance.
  • Sales and refinances: Buyers, mortgage lenders, and closing agents usually require liens to be resolved or paid from closing proceeds. A lien can delay or derail a sale or refinance if not addressed early.

Real-world examples (based on professional experience)

  • In my practice I’ve seen homeowners unable to close a refinance until a lien was paid or subordinated; in one case the borrower negotiated subordination so the mortgage lender had first priority, allowing the refinance to proceed.
  • Small-business owners sometimes find liens complicate business sales or property transfers because buyers insist on clear title and can walk from deals when liens surface.

Options to resolve or limit a lien’s impact

  1. Pay in full — the IRS issues a Certificate of Release when the liability is satisfied.
  2. Enter an Installment Agreement — the IRS may file the lien while you pay, but resolving payments can lead to release.
  3. Offer in Compromise (OIC) — if approved, it can settle the debt for less than the full amount.
  4. Request subordination — the IRS allows other creditors to have priority over the lien (useful for refinancing).
  5. Request withdrawal — in limited circumstances the IRS may withdraw a Notice of Federal Tax Lien to facilitate a transaction; withdrawal removes public filing but does not remove the tax debt. See practical steps to request withdrawal or subordination on FinHelp. How to Release a Federal Tax Lien: Options and Timing and Practical Steps to Request a Withdrawal or Subordination of a Tax Lien.

Practical tips to protect credit and property deals

  • Act early: Address IRS notices promptly to avoid a lien filing.
  • Communicate with lenders and title companies: If a lien exists, disclose it early so parties can plan for payoff, subordination, or withdrawal.
  • Get documentation: Obtain the IRS Certificate of Release, subordination agreement, or withdrawal in writing and provide it to title companies and lenders.
  • Use professional help: Tax attorneys, enrolled agents, and experienced CPAs can negotiate OICs, installment agreements, or withdrawals on your behalf.

Common mistakes and misconceptions

  • “A released lien disappears immediately from all records.” A paid or released lien removes the government’s claim, but public records already indexed may take time to update. If a lien appeared on a credit report before changes to reporting standards, it could have retained reporting effects — check with each credit bureau. (CFPB)
  • “Liens only affect the specific property listed.” A federal tax lien is broad; it attaches to all current and future property and rights to property owned by the taxpayer in the jurisdiction.

Short FAQ

  • Will paying the tax remove the lien right away? The IRS issues a Certificate of Release after payment; timing varies, but you should get written confirmation and then follow up with title companies and credit bureaus as needed.
  • Can I contest a lien? Yes — if you believe the lien was filed in error, pursue the IRS appeals process or consult a tax professional.

Authoritative sources and additional reading

Related FinHelp articles

Professional disclaimer

This article is educational and not legal or tax advice. For advice tailored to your situation, consult a tax attorney, enrolled agent, or CPA.