How Federal Tax Liens and the United States Right of Redemption Affect Title
Benjamin Franklin once said, “Nothing is certain except death and taxes.” In honor of tax season, let us take this opportunity to discuss federal tax liens and the United States right of redemption—a lesser-known area of tax code that could potentially affect your title transaction.
What is a Federal Tax Lien?
When federal taxes are not paid, the Internal Revenue Service (IRS) may file a federal tax lien. It automatically attaches to all of the taxpayer’s property, including real property, and becomes part of the public record when properly filed.
In a typical title examination, a recorded federal tax lien triggers a commitment requirement for a release. However, complications can arise when the lien appears to have purportedly been eliminated through a court of action or sale in the chain of title.
When Can a Federal Tax Lien be Eliminated?
Although federal law overrides state law, the U.S. Code provides limited circumstances where the United States can be named as a party in a civil action, district court or state court action, and an inferior federal tax lien may be eliminated. These proceedings may appear in your chain of title and can give the impression that the lien has been extinguished.
Common examples include:
- Quiet title
- Judicial foreclosures
- Tax deed or tax foreclosures sales
If the United States is properly named and served, an inferior federal tax lien may be eliminated by the judgment or sale. However, elimination of the lien does not necessarily eliminate all federal rights.
Understanding the United States’ Right of Redemption
In addition to following underwriting guidelines when insuring after these actions, it is imperative to remember that the United States has a right of redemption.
Pursuant to 28 U.S.C. 2410(c), the right of redemption is “120 days or the period allowable for redemption under state law, whichever is longer.”
To redeem, the United States must pay the purchaser:
- The actual amount paid by the purchaser at such foreclosure or tax deed sale
- Interest, plus
- Certain allowable expenses.
If redeemed, the court can order the purchaser to convey the title to the United States or to transfer the title by judgment.
Why the Right of Redemption Matters to Title Agents
For title professionals, the United States’ right of redemption presents a critical underwriting and insurability risk. If a closing occurs within the applicable redemption period, the insured’s title could be divested if the government exercises its right.
For this reason, it is essential to:
- Identify whether a federal tax lien existed in the chain of title
- Confirm whether the lien was eliminated through a qualifying action
- Determine whether the federal redemption period has expired prior to closing
If closing within the redemption period, an exception for the United States’ right of redemption will be required.
Best Practices When Insuring Over Federal Tax Liens
When a transaction follows a foreclosure, tax sale, or quiet title action that purportedly eliminated a federal tax lien, title agents should:
- Follow company‑specific underwriting guidelines
- Carefully calculate the applicable federal redemption period
- Avoid insuring without exception if closing occurs during the redemption window
- Or seek a release or waiver of the United States’ right of redemption in order to remove the exception
Proactive review and consultation can prevent last minute delays and post closing exposure.
Final Takeaways for Title Agents
Federal tax liens and the United States’ right of redemption may not surface often, but when they do, they demand close attention. Understanding how these rights operate—and when they expire—helps ensure clear, marketable title and confident underwriting decisions.
For additional guidance, reach out to your local Stewart representative for more information. Visit virtualunderwriter.com for up-to-date information on the latest in underwriting.
If you are a Stewart Trusted Provider™, feel free to contact your Stewart underwriting counsel to help answer your questions and evaluate risk.
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