The 19-year-old has played himself onto the Wallabies radar with four strong Super Rugby Pacific performances after debuting in round one having emerged via England's academy system.
His signing could prove part of a triple boost for the Reds, with reports suggesting Wallabies duo Suliasi Vunivalu and Harry Wilson are also poised to extend their deals.
Lynagh got a nod from new Wallabies boss Eddie Jones' first training camp selections at the weekend, listed as a player who was not considered due to injury.
After an enforced concussion lay-off, the youngster is set to return to the Reds' line-up on Friday night in a crunch encounter with the in-form ACT Brumbies.
"I'm learning plenty from the coaching staff and players at the Reds and have enjoyed getting a taste of Super Rugby so far this season," Lynagh said.
"It's an exciting time in Queensland and Australian rugby and I'm looking forward to being a part of it over the next few years."
Reds rugby boss Sam Cordingley said the teenager - who was born in Italy, brought up in England and is the son of Wallabies great Michael Lynagh - was held in very high regard at the club.
"Consider the resilience it takes as a 17-year-old to decide to move to the other side of the world, by yourself, to pursue your rugby goals," he said.
"He has certainly shown this season that he is going to carve his own path in Queensland and Australian rugby."
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