The Difference Between Owing Taxes and Having a Lien Filed

These two things get conflated constantly, and conflating them leads to bad decisions. Owing the IRS money is not the same as having a federal tax lien recorded against you.

Under IRC § 6321, a federal tax lien arises automatically the moment the IRS assesses a tax, sends a demand for payment, and the taxpayer fails to pay. At that point the government has a lien — but it’s secret. It encumbers your property rights, but no one looking at public records can see it.

The Notice of Federal Tax Lien (NFTL) is a different document. It’s what the IRS files with your county recorder (or, in some states, the Secretary of State) to make that lien public and to establish priority over other creditors. Under IRC § 6323, the IRS must file the NFTL to have priority over later purchasers, mortgagees, and judgment lien creditors who don’t have actual notice of the underlying lien.

This distinction matters for real estate. A title company’s search will find a recorded NFTL; it won’t find the underlying lien if no NFTL has been filed. So if you owe the IRS but no NFTL is on file, the practical effect on a home purchase is limited to: (1) the lender’s own underwriting questions about your tax compliance status, and (2) whether you’re in a repayment agreement that keeps you current. The title is clean.

Once an NFTL is filed, every buyer, lender, and title company sees it. At that point, the transaction becomes complicated.

How a Federal Tax Lien Affects a Home Purchase

A recorded NFTL attaches to all property — real and personal — belonging to the taxpayer. That includes any home you try to buy if the purchase funds flow through you. More practically: the title to a home you’re trying to buy will not be clean if an NFTL is outstanding. Most conventional lenders won’t close on a purchase where the buyer has an active federal tax lien.

The mechanics work like this: when you buy real property, the federal tax lien doesn’t automatically transfer to the new property in the way it encumbers existing property. But the NFTL is still attached to you as a debtor. After-acquired property — property you acquire after the lien arises — falls under the lien under Treas. Reg. § 301.6321-1. So the house you’re purchasing becomes encumbered from the moment of acquisition.

Practically, this means the seller’s title company will flag the NFTL. The lender won’t close. The transaction stalls unless you address the lien directly.

There are situations where this is more navigable. VA loans, for example, have specific guidance that allows closing with an IRS installment agreement in good standing, provided the agreement is documented and the borrower is current on payments. FHA guidelines require tax debt to be paid or in a repayment plan. Conventional Fannie Mae and Freddie Mac loans are stricter. The rules shift depending on loan type, lender overlay, and how the NFTL was filed.

The short version: if no NFTL is filed, you have options. If one is filed, you need a strategy before you can close.

How a Federal Tax Lien Affects Refinancing

Refinancing with an active NFTL is technically possible, but the new lender’s mortgage won’t automatically have priority over the federal tax lien. Under IRC § 6323, the IRS lien has priority over a subsequent mortgage unless the IRS agrees to step aside.

No lender will close a refinance when their mortgage will be subordinate to a federal tax lien. The IRS’s claim would be senior — meaning if you defaulted and the property were sold, the IRS would get paid before the lender. That’s a deal-killer for any conventional refinance.

The solution for refinancing is lien subordination — the IRS agrees to step behind the new mortgage in priority even though it has an older lien. The IRS has a formal process for this under IRC § 6325(d) using Form 14134. It’s not automatic, but it’s something the IRS does regularly when the taxpayer has an installment agreement and the refinance proceeds either pay down tax debt or clearly don’t reduce the IRS’s equity position in the property.

Can You Get a Mortgage If You’re on an IRS Installment Agreement?

This is one of the most common questions we hear. The answer depends on the loan type and whether an NFTL has been filed.

If you’re on a compliant installment agreement and no NFTL has been recorded, many lenders will approve a mortgage. The IRS won’t be on the title report. The lender’s underwriter will typically ask for proof of the payment agreement and documentation that you’re current. This is an underwriting question, not a title question.

If an NFTL has been filed, being on a payment plan isn’t enough by itself. The lender still sees the lien on title and won’t subordinate their mortgage to it without the IRS’s written consent. In that scenario, you’re back to needing a Certificate of Discharge, subordination, or withdrawal.

One nuance: the IRS doesn’t file an NFTL on every delinquent account. Under its Fresh Start guidelines, the IRS generally won’t file an NFTL for liabilities under $10,000 and may withdraw a lien once a taxpayer enters a Direct Debit Installment Agreement for amounts between $10,000 and $25,000. If your balance falls in that range and you’ve been proactive, you may be able to avoid an NFTL filing altogether — which keeps your real estate options open.

Certificate of Discharge: How to Buy a Home Despite an Active Lien

A Certificate of Discharge under IRC § 6325(b) removes the federal tax lien from a specific piece of property, allowing it to be transferred with clean title. The federal tax lien still exists — it’s just released from that particular parcel.

The IRS will grant a Certificate of Discharge in two main situations:

First, when the property is sold and the IRS either receives the portion of the proceeds equal to its lien interest (the fair market value of the property minus senior encumbrances, multiplied by the ratio of the unpaid tax to total liens), or when the amount of the tax lien exceeds the value of the property and there’s no equity for the IRS to attach to.

Second, when the taxpayer substitutes other adequate security — typically a bond or a cash deposit with the IRS — so the discharge doesn’t impair the IRS’s ability to collect.

You apply using Form 14135, and the IRS asks for supporting documentation including a current title report, a qualified appraisal, a settlement statement, and the purchase agreement. Processing time can run four to eight weeks, though the IRS can expedite for imminent closings. Request early.

One thing worth understanding: a Certificate of Discharge is property-specific. It releases that parcel from the lien; it does not resolve the underlying tax debt. The lien reattaches to other property you own and to any new property you acquire. Discharges are a closing tool, not a resolution tool.

Lien Subordination: How to Refinance Despite an Active Lien

Lien subordination under IRC § 6325(d) lets a new mortgage leapfrog the federal tax lien in priority, even though the lien is older. The IRS is still owed the money — it just agrees that the new lender gets paid first in a foreclosure scenario.

The IRS will grant subordination when doing so either facilitates collection (for example, because the refinance proceeds will be used to partially pay the tax debt) or doesn’t impair the government’s interest. The IRS looks at: the value of the property, the amount of the existing mortgage and the proposed new mortgage, and the taxpayer’s overall equity position.

You apply on Form 14134. The IRS needs a current appraisal, the loan payoff statements, the new loan terms, and an explanation of why subordination makes sense. Processing typically runs four to eight weeks.

Timing is the biggest practical issue. Lenders operate on rate locks that expire. If you’re refinancing and need subordination, build the IRS’s processing time into your timeline from the start — not two weeks before closing.

Lien Withdrawal: Getting the IRS to Remove the Lien Entirely

A lien withdrawal is different from a discharge or subordination. Withdrawal under IRC § 6323(j) removes the NFTL from public records entirely, as if it were never filed. The underlying tax lien still exists (until the debt is paid), but there’s nothing on title.

The IRS will withdraw an NFTL in four situations:

1. The NFTL was filed prematurely or in violation of IRS procedures.
2. Withdrawal will facilitate collection of the tax liability (for example, because the taxpayer needs clean title to sell property and use the proceeds to pay the debt).
3. The taxpayer has entered a Direct Debit Installment Agreement (DDIA) for a liability of $25,000 or less, and has made at least three consecutive payments.
4. The taxpayer has paid the debt in full.

The DDIA withdrawal provision is particularly useful. If your balance is $25,000 or less, entering a Direct Debit agreement and making three payments can clear the lien from title — which reopens refinancing and purchasing options without having to fully pay the debt first. You apply on Form 12277.

Full payment is the cleanest path. Once the liability is satisfied, the IRS must release the lien within 30 days under IRC § 6325(a). You can then request a formal certificate of release and record it with the county. At that point the title is fully clear.

The Practical Sequence: What to Do Before You Try to Close

If you’re trying to buy or refinance a home while owing the IRS, here’s the sequence that actually works:

Step one: Pull a tax transcript and check for NFTL filings. Your tax attorney can order a Wage and Income Transcript and an Account Transcript. Call the IRS Centralized Lien Unit at 1-800-913-6050 to confirm whether an NFTL has been filed and in which jurisdictions. Don’t assume — lenders will find it if it’s there.

Step two: Assess the balance and options. Under $25,000 with a Direct Debit agreement: pursue lien withdrawal. Under $50,000 with a Streamlined Installment Agreement: the NFTL may not be required at all if you haven’t already triggered one. Over $50,000: a Collection Information Statement (Form 433-A or 433-F) is typically required, and the IRS will generally file an NFTL on the higher balance.

Step three: Get into a compliant agreement before applying for the loan. Lenders want to see that you’re in good standing with the IRS. Being current on a payment agreement — even if the balance isn’t paid — often satisfies underwriting for VA and FHA loans. For conventional loans, you may need the lien resolved.

Step four: Request the appropriate IRS action early. Discharge for a purchase, subordination for a refinance, withdrawal if you qualify. Budget eight weeks minimum. Keep your rate lock out of the critical path.

Trying to squeeze an IRS lien resolution into a 30-day closing timeline almost always fails. The process is navigable, but it requires lead time.

Will IRS Tax Debt Affect Your Credit Score?

As of April 2018, all three major credit bureaus — Equifax, Experian, and TransUnion — stopped including tax liens in their credit reporting. Federal tax liens no longer appear on your credit report and no longer affect your credit score directly.

That said, the NFTL is still a public record. It appears in court and property records databases. Mortgage lenders run title searches and public records checks as part of underwriting — they will find an NFTL even if it doesn’t appear on your credit report. The credit score issue is separate from the title issue, and it’s the title issue that blocks closings.

A Note on Tax Debt in Community Property States

California is a community property state. If you’re married and only one spouse owes the IRS, the tax lien can still encumber community property — including real estate purchased jointly or during the marriage. Under California law, the IRS’s lien on one spouse’s interest in community property affects the couple’s ability to sell or refinance, because the non-debtor spouse’s interest is intertwined with community assets.

This comes up constantly in California. The IRS can and does reach community property for one spouse’s separate federal tax liability. If you’re in this situation, the analysis is more complicated, and the resolution tools — discharge, subordination, withdrawal — still apply but require careful documentation of community versus separate property.

Working With Brotman Law on a Real Estate Transaction

These situations are solvable. A recorded federal tax lien doesn’t mean the transaction is dead — it means the transaction needs to be structured properly. We’ve handled discharge requests, subordination agreements, and lien withdrawals for clients buying and refinancing real estate throughout California.

The earlier we’re involved, the more options are available. We can communicate directly with the IRS Centralized Lien Unit on your behalf, prepare the Form 14134 or Form 14135 application with the supporting documentation lenders need, and coordinate the timeline with your escrow and lender so the process actually fits the closing schedule.

If you have a real estate transaction on the horizon and unresolved IRS tax debt, the time to address it is before you go into escrow — not during it.