Lynch was educated in Los Angeles and Michigan at Interlochen Arts Academy. Together with her mother, Lynch made a brief appearance in her father's debut feature film Eraserhead, but her appearance was not included in the final cut. Lynch subsequently worked as a production assistant on Blue Velvet (1986), also directed by her father.

In 1993, Lynch directed the music video "Living in the Rose" by the British rock band New Model Army.

Following a lengthy hiatus, Lynch returned to the public arena with the film Surveillance and, in October 2008, Surveillance won the top prize at the Festival de Cine de Sitges. A month later, Lynch became the first woman to receive the New York City Horror Film Festival's Best Director award.

Lynch revealed in a 2009 interview that she underwent three spinal surgeries following the release of Boxing Helena due to a car accident that occurred when she was 19 years old. In the same interview, Lynch stated that she is a single mother to a 13-year-old daughter.

On March 21, 2010, Lynch was a judge at the International Surrealist Film Festival and she worked as Producer for the Corey Brandenstein natural horror film The Compound.

Lynch was scheduled to film Visibility for the Motion Picture Corporation of America in 2011, but, as of June 2013, this project is not completed. Lynch then directed and co-wrote the 2012 horror film Chained, in which Vincent D'Onofrio stars as a cab-driving serial killer.

An Australian documentary titled Despite the Gods, which chronicles Lynch's struggle to make the film Hisss, was released in 2012. The documentary was shown at the Canadian International Documentary Festival and the program described the film: "Out of her depth shooting on location with an Indian crew and two top Bollywood stars, Lynch turns her production into a vehicle for her own self-actualization, paying no regard to timeline, budget or reality. As the story in front of the camera derails, the story behind the camera explodes.". She eventually disowned the film.

As of June 2013, Lynch is filming A Fall from Grace. The film stars Tim Roth as a St. Louis detective investigating the murder of young girls by a mysterious assailant and is scheduled for release late in 2015. A trailer for A Fall from Grace was published on March 7, 2013 by Apothecary Films Producer David Michaels, who worked with the Director on Surveillance. Co-written by Producer Eric Wilkinson, the film is set and filmed in St. Louis, U.S. and is inspired by the Old Chain of Rocks Bridge.

As of 2015, she is also a member of the board of advisers for the Hollywood Horror Museum.