Are Federal Tax Liens Wiped Out by Foreclosure? Notice and Redemption

Whether federal tax liens are wiped out by foreclosure depends on two things: where the IRS lien sits in the priority order, and whether the foreclosing party brought the government into the process the way federal law requires. Get both right and the lien comes off the property at the sale. Get either wrong and the lien stays, and whoever buys at the auction takes the property with the tax debt still attached.¹

Priority Decides Whether the Lien Can Be Wiped Out at All

A federal tax lien takes its priority from the date the IRS files a Notice of Federal Tax Lien in the public records. Older filings outrank newer ones under the standard “first in time, first in right” rule. A foreclosure sale eliminates liens that rank below the one being foreclosed and leaves untouched any lien that ranks above it.

So the first question is always whether the federal tax lien was recorded before or after the mortgage (or other lien) being foreclosed. If the tax lien is senior, foreclosure cannot remove it. The buyer takes the property subject to it, full stop. If the tax lien is junior, foreclosure can remove it, but only if the IRS was properly notified or joined. Everything below assumes the tax lien is junior. If it isn’t, the answer is simply no.

Judicial Versus Nonjudicial Foreclosure

Federal law treats court-supervised foreclosures and trustee sales differently, and the notice mechanism is different for each.¹

In a judicial foreclosure, the lender files a lawsuit and the court orders the sale. The IRS must be joined as a party to that lawsuit. If it was, and the tax lien is junior, the sale discharges the lien under local law. If the IRS wasn’t named, the sale does not disturb the lien. There is no separate mailed notice for judicial sales; naming the government in the suit is the mechanism.

In a nonjudicial foreclosure, there is no lawsuit for the IRS to be part of. Instead, the foreclosing party must send the IRS written notice of the sale at least 25 days in advance, by registered or certified mail or personal service. Regular mail and email do not satisfy the statute. The notice has to reach the IRS Advisory Consolidated Receipts office designated in Treasury regulations. Most of the trouble around federal tax liens and foreclosure lives here, because everything depends on the foreclosing party doing the notice correctly.

What the 25-Day Notice Must Contain

A notice that arrives on time but leaves out required information can be treated as inadequate, which has the same effect as no notice at all. According to IRS procedures, an adequate notice includes:²

The name and address of the person or entity giving notice.
A copy of each Notice of Federal Tax Lien affecting the property, or a list showing the taxpayer’s name, the date and place each lien was filed, and the IRS office named on the filing.
The address and legal description of the property from the deed or title, with any distinctions for multiple parcels.
The date, time, location, and terms of the proposed sale.
The approximate principal and interest owed to the foreclosing creditor.
Legal costs, selling costs, and other expenses that will come out of the sale proceeds.

If you’re bidding at a trustee sale, this list is worth checking against whatever the foreclosing party can show you. If they can’t produce proof the notice was sent by certified or registered mail and contained these items, assume the lien will survive.

When the IRS Was Properly Notified or Joined

Where the government was joined in a judicial suit, or received a valid 25-day notice before a trustee sale, and its lien is junior to the foreclosing lien, the sale removes the tax lien from the property. The buyer takes title free of that lien.

Two things go with that outcome. First, if the sale produces surplus funds after the foreclosing lien is satisfied, the IRS can claim those proceeds with the same priority its lien had against the property. The government loses its hold on the real estate but keeps its claim on the money. Second, and more consequential for the buyer, the IRS gets a right of redemption on the property itself.

The IRS Right to Redeem the Property

When a foreclosure properly discharges a junior federal tax lien, the government has the right to buy the property back from the winning bidder. The window is 120 days from the sale date, or the redemption period allowed under state law, whichever is longer.¹ Some states allow six months or a year, which stretches the federal floor.

To redeem, the IRS pays the buyer the full amount paid at the sale, plus interest at 6 percent per year from the date of sale.³ The government also reimburses necessary maintenance expenses, calculated as costs incurred minus any income the property produced and minus a reasonable rental value if the buyer used or under-rented the property.⁴

The IRS reads “necessary” narrowly. Recording fees, insurance, new locks, and repairs that prevent value-reducing damage generally qualify. Improvements, upgrades, most utility bills, cleaning costs, and accrued property taxes generally do not. Practically, this means the redemption window is a bad time to renovate. The IRS uses this right infrequently because it lacks the staff to evaluate every sale, but the possibility depresses auction prices and makes lenders cautious about financing purchases before the window closes.

Clearing the Redemption Right Early

A buyer doesn’t have to wait out the full period. The IRS can issue a certificate stating it will not exercise its redemption right.⁴ After a judicial sale, the application is Department of Justice Form OBD-225, submitted to the U.S. Attorney for the district where the property sits, and it requires both a fair market value and a forced sale value appraisal.⁵ After a nonjudicial sale, the application and supporting evidence go to the IRS Advisory Group Manager for the area. The IRS may charge a fee equal to the value of the redemption right based on the appraisal and remaining tax debt, and if it determines the right has no value (typically because senior liens consume all the equity) it can release it for free.

When the IRS Wasn’t Properly Notified

If the foreclosing party never sent the 25-day notice, sent it late, sent it by the wrong method, or left out required information, the federal tax lien survives the sale. The property transfers with the lien still attached, and the IRS can enforce collection against it, including through seizure and sale of the property in the buyer’s hands.

This is the scenario that catches foreclosure buyers off guard. Nothing about the auction itself signals the problem. It surfaces later, on a title search when the buyer tries to sell or refinance. By then the choices are limited: pay off the tax debt, negotiate a discharge with the IRS under 26 USC 6325 to detach the lien from the specific property, or try to unwind the sale.⁶ A pre-sale discharge is also available on several grounds, including where remaining property is worth at least double the lien plus senior encumbrances, where the IRS receives an amount equal to the value of its interest, or where senior liens leave the government with no real interest to protect; IRS Publication 783 and Form 14135 cover the process.⁷

The lien is not permanent. The IRS generally has 10 years from the date of assessment to collect, after which the lien releases automatically.⁸ Certain events can pause or extend that clock, and 10 years is a long time to hold property that can’t be cleanly sold or financed.

Checking for Federal Tax Liens Before You Buy

Notices of Federal Tax Lien are filed where state law directs, typically the county recorder’s office for liens against real estate.⁹ A standard title search in that county should reveal any filed liens. Before bidding at a foreclosure auction, ordering a title search is the single most important step against buying someone else’s tax problem.

The IRS’s own Automated Lien System database is not a substitute. The agency warns that the data may be incomplete or inaccurate and directs anyone needing official confirmation to check with the local filing jurisdiction.¹⁰ And even a clean-looking lien picture doesn’t answer the second question: whether the IRS was properly notified or joined for this sale. That answer comes from the foreclosing party or their attorney, in the form of proof that the government was named in the suit, or that the 25-day notice was sent by certified or registered mail with the required contents. Without that proof, the safer assumption is that the lien will still be there after the gavel falls.

1
Office of the Law Revision Counsel. 26 USC 7425 – Discharge of Liens
2
Internal Revenue Service. 5.12.4 Judicial/Non-Judicial Foreclosures
3
Office of the Law Revision Counsel. 28 USC 2410 – Actions Affecting Property on Which United States Has Lien
4
Internal Revenue Service. 5.12.5 Redemptions
5
United States Department of Justice Archives. Form OBD 225 – Application for Release of Right of Redemption in Respect of Federal Tax Liens
6
Office of the Law Revision Counsel. 26 USC 6325 – Release of Lien or Discharge of Property
7
Internal Revenue Service. Application for Certificate of Discharge of Property from Federal Tax Lien
8
Internal Revenue Service. Time IRS Can Collect Tax
9
eCFR. 26 CFR 301.6323(f)-1 – Place for Filing Notice; Form
10
Internal Revenue Service. Automated Lien System (ALS) Database Listing