The filing of a Notice of Federal Tax Lien by the IRS automatically applies to all your property, including your home. Although a tax lien does not lead to immediate collection of your tax debt, such as through wage garnishment or bank account levy, it does encumber your property. When taxpayers decide to sell their property, the tax lien issue can often cause concern. Many taxpayers believe that if they can’t pay the lien in full, they cannot sell their house, but this is false. The tax lien acts like a blanket covering all assets the taxpayer owns. However, an IRS lien discharge can remove an asset from under the lien and provide the buyer with clear title. After the property in question is sold and the lien discharged, the lien remains attached to all of the taxpayer’s other assets.
Conditions to Request an IRS Lien Discharge
You can request a lien discharge when any of the following conditions are met:
- Partial payment –You pay the IRS an amount equal to their lien interest in the property to be discharged. This occurs when there is equity in your home, but it is insufficient to fully pay the outstanding tax liability. For example, you owe the IRS $130,000 and have your house under contract at a sale price of $400,000. Your mortgage balance is currently $300,000, and closing costs will be $30,000. Your home equity is $70,000 ($400,000 sale price – $300,000 mortgage – $30,000 closing costs). The IRS will accept $70,000 of the $130,000 you owe them and discharge their tax lien from the house.
- No equity – It is determined that the government’s interest in the property to be discharged has no value. Let’s use the amounts from the previous example, except that you owe $370,000 rather than $300,000 on your mortgage. Closing costs are still $30,000. In this case, your home equity is $0 ($400,000 sale price – $370,000 mortgage – $30,000 closing costs). The IRS will discharge the tax lien from your house without paying it, as your property has no equity.
- You have other property worth twice the IRS Debt- The IRS may, at its discretion, discharge a lien on a property to enable a taxpayer to sell it, provided the taxpayer owns other property with a value double the sum of the tax debt and other encumbrances that have priority over the tax lien. Example: The taxpayer wants to sell property worth $150,000 and has a prior mortgage and expenses of sale of $110,000. The taxpayer owns other property with a fair market value of $400,000 with a mortgage of $60,000. The taxpayer owes the IRS $100,000. The taxpayer can request a lien discharge on the first property because the second property is worth more than twice the tax liability ($400,000 is 250% of $100,000 + $60,000). This method of obtaining a lien discharge is rarely used.
- Property is sold, and proceeds are held in escrow. This situation can occur when multiple secured creditors, including the IRS, dispute their respective rights (priority) to sale proceeds. The funds are held in escrow until the dispute is resolved.
- A third party provides a deposit or bond equal to the IRS lien interest in the property. Suppose a third party purchased a property subject to an IRS tax lien but did not obtain a certificate of discharge and now wishes to have the lien discharged. In that case, they can either provide a deposit acceptable to the IRS or obtain a surety bond. The third party then has 120 days to file a court action to determine whether the value of the government’s interest in the property is less than the value determined by the IRS. If the third party takes no action, the IRS will apply the deposit or collect on the bond to satisfy the tax lien.
If the taxpayer reacquires the discharged property, the tax lien will reattach.
IRS Lien Discharge Application
To request a discharge from an IRS lien, you must use Form 14135, “Application for Certificate of Discharge of Property from Federal Tax Lien.“. In addition to the information you’ll need to provide in the application, you must also submit the following documents:
- The contract for sale
- Copy of the deed
- An appraisal and county valuation
- The draft closing statement
- Title report, mortgage payoff letters, and evidence of other liens ahead of the IRS
- Copy of Federal Tax Lien
The IRS asks that you submit your application at least 45 days before the sale. If your request for an IRS lien discharge is denied, you can file an appeal by submitting Form 9423.
Get Help Discharging a Federal Tax Lien
Obtaining a Certificate of Discharge for a federal tax lien can be complex and time-consuming. To ensure the correct filing of your application, we recommend seeking advice from a qualified tax professional. Call East Coast Tax Consulting Group at 561-826-9303 for help with your IRS lien discharge or other IRS tax problems.
Frequently Asked Questions (FAQs)
What is an IRS lien discharge?
An IRS lien discharge is a formal release of the government’s legal claim against a specific piece of property. It removes the IRS lien from that property, allowing you to sell or transfer it even if your tax debt is not fully paid.
How is a lien discharge different from a lien release?
A lien release eliminates the IRS’s claim on all of your property once the tax debt is paid in full or the statute of limitations expires. A discharge, by contrast, applies only to a specific property, removing the lien from that asset while the lien may remain on other property.
Can I apply for a lien discharge if I’m in an installment agreement?
Yes. Being in an installment agreement does not prevent you from applying for a discharge. In fact, if the IRS will receive proceeds from the transaction or if your request benefits them, approval is more likely.
Is a lien discharge the same as lien subordination?
No. A subordination doesn’t remove the lien but lets another creditor (like a mortgage lender) move ahead of the IRS in priority, which may allow refinancing.
What form do I use to apply for a lien discharge?
You must file IRS Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien) and provide supporting documentation, such as an appraisal, settlement statement, and loan details.
How long does it take to get approval?
The IRS recommends submitting your application at least 45 days before closing on a sale. Processing time depends on the complexity of your case, the IRS’s workload, and whether all required documents are provided.
What happens if my lien discharge request is denied?
If the IRS denies your application, you can appeal the decision by filing Form 9423 (Collection Appeal Request) or by providing additional documentation and reapplying.