Overview
Tax liens are a legal tool governments use to secure unpaid tax debts against a taxpayer’s assets. They’re recorded as public liens on real property (and sometimes other assets), creating a priority claim that usually must be satisfied before a property can be sold or refinanced. In practice, tax liens matter more for title searches, mortgage closings, and sale proceeds than they do for most modern credit reports.
This article explains how tax liens are created, how they interact with credit reporting and title transfers, and practical steps to resolve or work around them so you can buy, sell, or refinance with fewer surprises.
How a tax lien is created and what it secures
- When federal, state, or local taxes go unpaid, the tax authority can file a legal claim (a lien) on the taxpayer’s property to secure collection. For federal taxes, the Internal Revenue Service (IRS) files a Notice of Federal Tax Lien (NFTL) in county or state public records to alert creditors and buyers that the government has a priority claim (see IRS guidance on notices of federal tax lien).
- A lien does not transfer ownership to the government. Instead, it gives the government a legal right to satisfy the debt from sale proceeds or other enforcement remedies.
Authority: IRS — Notice of Federal Tax Lien (irs.gov).
Do tax liens still affect your credit score?
Short answer: Not as directly as in the past.
- Historically, public-record tax liens were listed on consumer credit reports and could remain visible for years, often damaging credit scores and making loans or credit harder to obtain.
- Since about 2018–2019 the three nationwide credit reporting agencies adopted stricter standards for including public records (tax liens and civil judgments) on credit reports. As a result, many tax liens no longer appear on consumer credit reports, and credit-scoring models like FICO now base scores on the information that the bureaus provide. The Consumer Financial Protection Bureau has detailed this change in how public-record data is included in credit files.
- Despite reduced visibility on credit reports, an outstanding tax lien can still affect lending decisions. Underwriters and title companies routinely run public-record and county-record searches. Lenders care about liens that affect collateral (homes, land, or business property) even when the lien doesn’t appear on a credit report.
Authorities: Consumer Financial Protection Bureau (CFPB); FICO; IRS.
How tax liens affect property sales and closings
Even when a lien is absent from a credit report, it remains in public records and affects real estate transactions:
- Title searches: Title companies search county land records for liens, judgments, and encumbrances. A recorded tax lien will show up during a title search and typically must be resolved to issue clear title or full title insurance.
- Closing holds: Most lenders will not fund a mortgage until liens that have priority over the lender’s security interest are paid or otherwise resolved. Buyers rarely accept taking title subject to an unpaid tax lien unless the sale price is adjusted and lien payment is arranged.
- Proceeds allocation: At sale, liens are usually paid from the seller’s proceeds at closing. If the sale price won’t cover liens and mortgages, the sale can collapse or require seller negotiation with the lienholder.
- Subordination, discharge, or bond: In limited scenarios, the IRS or state tax authority may subordinate the lien (allowing the mortgage to remain first), discharge the lien from a specific parcel, or accept a bond to permit closing. These are case-by-case and often need formal requests and documentation.
Internal resources: For practical options when the IRS files a lien and the steps to remove or work around it see FinHelp’s guides: Options When the IRS Files a Notice of Federal Tax Lien and The Process of Releasing a Federal Tax Lien.
Common paths to resolve a tax lien before selling
- Pay the tax debt in full and obtain a release. Once liability and interest/penalties are paid, the tax authority issues a Certificate of Release (or equivalent) removing its claim from the public record for that property.
- Installment agreement: The taxpayer arranges monthly payments. Some lenders and title companies will accept a signed installment agreement plus proof that payments are current, but many still require payoff at closing unless a subordination or other accommodation is granted.
- Offer in Compromise (OIC): If eligible, the taxpayer may settle for less than the full amount. An approved OIC followed by issuance of a release resolves the lien.
- Subordination: The IRS can agree to subordinate its lien behind a new mortgage so the homeowner can refinance; this does not remove the lien but changes priority. See FinHelp’s post on subordinating a federal tax lien for details.
- Discharge of property: Requesting the IRS discharge a specific parcel (so it’s released from the lien) is possible if the sale proceeds or other arrangements ensure collection.
- Bond or escrow: Some jurisdictions allow a surety bond or escrow to be posted in place of the lien to permit closing while protecting creditors.
Note: Timing matters. Requests like discharge or subordination require IRS review and can take weeks to months—start early in any sale process.
Real-world examples (anonymized)
- Example 1: Home sale delayed by federal lien. A client discovered a federal tax lien recorded years earlier when a title search began. The buyer’s lender required the lien cleared. We negotiated an installment agreement and provided the lender a collateral subordination letter from the IRS, which allowed closing while the taxpayer continued payments under the agreement.
- Example 2: Inherited property with county tax lien. An heir tried to transfer title after probate and learned a local property tax lien existed. Because the lien related to ad valorem property taxes, the county required payoff from sale proceeds before issuing a clean title.
These examples show that even if a lien is no longer on a credit report, it can silently block transactions until addressed.
What buyers, sellers, and lenders should do
- Sellers: Run a title search early, obtain payoff quotes for liens, and begin lien-resolution steps well before listing. Share documentation with potential buyers and lenders to avoid last-minute delays.
- Buyers: Require title insurance and insist on proof of release or payoff at closing. Consider escrow holdbacks only with clear legal and title company approval.
- Lenders and title companies: Perform public-record searches and require evidence of lien resolution. Where appropriate, request subordination, discharge, or a bond.
FinHelp internal guide for related procedural steps: The Process of Releasing a Federal Tax Lien.
Practical timeline and expectations
- Immediate: When notified of a lien, collect the lien notice, balance due, and recording details. Contact a tax advisor and the tax authority to discuss options.
- Short term (days–weeks): Negotiate payment plans, request subordination, or obtain payoff figures. If a sale is pending, provide documentation to the buyer’s lender and title company.
- Medium term (weeks–months): If pursuing an OIC, discharge, or withdrawal, expect multi-week reviews. Factor this time into closing schedules.
Common mistakes to avoid
- Assuming a lien won’t matter because it’s not on your credit report. Many title searches will still find the lien.
- Waiting until the day of closing to address a lien. Resolution often takes weeks.
- Paying a third party that promises to remove a lien without documentation. Always get written proof of release from the taxing authority and the county recorder.
When to get professional help
- Complex balances, business property, multi-owner parcels, or cross-jurisdictional liens benefit from a tax attorney or enrolled agent. If a sale or refinance is at risk, seek counsel familiar with lien subordination, discharge, and title-company processes.
Authoritative resources
- IRS — Notice of Federal Tax Lien and taxpayer guidance (irs.gov)
- Consumer Financial Protection Bureau — on public records and credit reporting (consumerfinance.gov)
- FICO — public records and credit-scoring guidance (fico.com)
Final checklist before listing or closing
- Obtain a current title search and full payoff statement for any recorded liens.
- Request written confirmation from the taxing authority about next steps, expected timelines, and required documentation to remove or subordinate the lien.
- Provide copies of IRS or state arrangements (installment agreement, OIC approval, bond, or discharge) to the title company and lender.
- Keep buyers and lenders informed; transparent documentation reduces the chance of a failed closing.
Professional disclaimer: This article is educational and not individualized tax, legal, or real-estate advice. For guidance specific to your situation, consult a qualified tax professional, attorney, or title advisor.
If you want, I can summarize steps to take today if you suspect a lien on your property or tailor a checklist for sellers preparing to close on a home with a recorded lien.
