Why & How to Apply for a Discharge of an IRS Tax Lien

IRS tax liens attach to all of your current and future property and your rights to property. To get the lien removed from a specific piece of property, you must request a discharge from the IRS. You can do so by filing Form 14135. For example, taxpayers often request a discharge if they want to sell a specific property so that they can pay their taxes. Read on to learn more, or use TaxCure to find a tax pro in your area today.

Key takeaways

• Lien discharge -- When the IRS removes a tax lien from a specific piece of property.
• When to use -- When the property has no value, you have double the lien value in other property, or you plan to sell and put the funds in escrow to pay the IRS.
• How to apply -- File Form 14135 and note why you want the discharge.
• Tips for success - Work with a tax pro who has experience with IRS tax liens.
• Other options -- Consider lien subordination, setting up payments to get a lien withdrawn, or other options based on your situation.

What is a Discharge When it Comes to IRS Tax Liens?

The discharge of an IRS tax lien removes the lien from a specific piece of property. If you apply for a lien discharge and the IRS grants your request, you can sell or refinance the property named in your Certificate of Discharge. Typically, the IRS will only approve a request for a discharge if doing so will help you pay your back taxes, or if it's otherwise in the best interest of the government. 

 

What Happens When the IRS Discharges a Tax Lien?

You will receive a Certificate of Discharge that removes the IRS tax lien from your property, but the discharge only applies to the property named in the certificate. Once the lien is discharged, you can now use that property as you like, but be aware that your options may be limited by the terms you agreed to when you requested the discharge.

If you receive a lien discharge:

• You will still owe your back taxes to the IRS, including any penalties and interest.
• The IRS tax lien will still cover all property other than the asset(s) named explicitly in the lien discharge certificate.

How to Request a Discharge of an IRS Tax Lien

To apply for a discharge, file Form 14135, Application for Certificate of Discharge of Property from Federal Tax Lien at least 45 days before the sale or settlement meeting.  Publication 783 provides the instructions for completing Form 14135, but here is a quick overview of how to complete this form:

1. Taxpayer information -- Note tax ID number, address, and contact details.
2. Applicant information -- Check the box if the taxpayer is the applicant; Otherwise, complete this section if a third party is applying for the lien discharge.
3. Purchaser, transferee, or new owner -- Tick the box if the applicant is also this person; If not, complete the details requested.
4. Attorney/representative -- Complete if applicable, and attach Form 2848 (Power of Attorney)
5. Lender, finance company, settlement company, or escrow company -- Fill out as relevant based on your situation. For example, if you're borrowing money against the asset, list the lender. If you're selling the asset and the proceeds are going into escrow, check with the escrow company.
6. Monetary info -- Here, you should list the proposed selling price and any funds that will go to the IRS, even if it's 0. 
7. Basis for discharge -- Choose one of the four items on the list; check out the section below for more details on when to use each of these options.
8. Description of the property -- Write a description of the property. Then, list the property address if applicable, and if relevant to your request, include a list of all of the remaining property that the lien is attached to.
9. Appraisal and evaluations -- Generally, you need to attach two appraisals: one completed by a professional uninterested party and another one, such as a county evaluation, an informal appraisal from a disinterested party, or a related option. Note which type of appraisal you've attached.
10. Copy of the federal tax lien -- Note details like the lien serial number and attach a copy of the notice of federal tax lien if possible. 
11. Copy of the sales contract or purchase agreement -- List these details and attach supporting documents if required.
12. Copy of a current title report -- Attach the title report and create a list of all liens or other encumbrances attached to the property.
13. Copy of proposed closing statement -- If selling the property, attach the proposed closing statement.
14. Additional information -- Note whether or not you've attached additional information. For example, if you're dealing with litigation related to this asset.
15. Escrow agreement - If you're requesting a discharge because the funds are going into escrow, you should note that and attach the agreement. 
16. Waiver -- If you're a third party, you may waive your right to put up a bond if you're applying for a discharge based on other factors. However, if you're applying for a discharge based on paying a bond, you should not include this waiver. Consult with a tax professional before waiving any of your rights. 
17. Declaration -- Sign, date, and you're done.

Reasons the IRS Will Grant a Tax Lien Discharge

As stated above, the IRS will approve the discharge of a tax lien on a specific piece of property or properties with good reason. When you complete section 7 of Form 14135, you must note the reason for the discharge. Here are the options along with their associated statute numbers:

• Your other property subject to the IRS tax lien is worth twice as much as your tax liability (6325(b)(1)). For example, if the IRS tax lien is $45,000, you will need to have at least $90,000 worth of assets subject to the Federal tax lien after the IRS grants the lien discharge for the requested property. If you have debt against these same assets, your equity must be double the secured debt plus your tax debt. To illustrate, imagine that you owe $100,000 on your mortgage, $20,000 on your car loan, and $30,000 on an IRS tax lien. The total of these debts is $150,000, so you must have $300,000 to get the lien discharged under this option. 

• You pay the IRS an amount equal to the IRS's lien interest in the property being discharged. (6325(b)(2)(A)) If you pay the IRS the same amount they could receive from their lien interest, they may give you a lien discharge. The IRS interest may be less than the full value of your property because other creditors, such as a mortgage lender, may have interests that are superior to the IRS tax lien. 

• You establish that the IRS tax lien interest in your property is worthless. (6325(b)(2)(B)) The IRS may discharge a lien if it doesn’t attach to any value. It can occur if you owe more to your mortgage lender than what your home is worth. The mortgage lender’s interest is superior to the IRS tax lien, so the government’s interest in your property has no value.

• You agree to sell your property and hold the funds subject to the IRS tax lien in escrow. (6325(b)(3)) You can use the sales proceeds to pay off a creditor with a superior interest to the IRS. In many cases, this could be a mortgage lender. But the rest of the funds have to stay in escrow, subject to the IRS tax lien.

• A third party provides a deposit or bond equal to the IRS lien interest in the property. (6325(b)(4)) If a third party owns property subject to your IRS tax lien, they can get a lien discharge by paying a deposit to the IRS. Then, the third party has to file an action in district court challenging the lien interest within 120 days, or they forfeit the deposit.

Why Would a Taxpayer Want to Discharge a Tax Lien?

A discharge can allow you to sell, transfer, or borrow against your property so that you can more easily pay your tax debt. It is very hard and often impossible to do any of those things when there is a lien attached to your property. A tax lien gives the IRS an interest in your property that can be used against your other creditors or someone who buys your property. A potential purchaser won’t want to buy your property as long as the lien is in place, and they will not be able to get a loan to buy the property. Additionally, it's nearly impossible to get loans against property that's encumbered by IRS tax liens, because lenders cannot effectively use an asset as collateral if the IRS already has a lien against it.

Alternatives to Lien Discharge

A lien discharge is not the only way to deal with a tax lien. Depending on the situation and your goals, you may want to consider the following options:

• Pay the tax debt in full - In most cases, this is not an option for taxpayers at this point, but if you can come up with the funds, paying in full releases the tax lien from all of your assets.
• Appeal the lien -- If the lien was issued in error or if it's harming you financially, you can appeal. Generally, you have 30 days after you receive the Notice of Federal Tax Lien to request a CDP hearing, but you may have other appeal rights for up to a year. 
• Request a withdrawal -- If you pay in full, the IRS will withdraw the lien from the public record, but typically, only if you've been compliant with payments and filings for the last three years. However, even if the lien hasn't been released due to full payment, you can get a withdrawal if you owe less than $25,000, set up direct debit installment payments, and make three on-time monthly payments.  
• Subordinate the lien - This is when you ask the IRS to let its lien take priority behind another lienholder. Most commonly, this happens if you want to take out a loan using an asset as collateral.

The right option varies based on the situation, but an experienced tax professional can help you come up with the best strategy to reduce the impact of the tax lien and resolve your tax debt with the IRS. 

Finding a Professional Who Can Discharge a Tax Lien

Not all professionals have experience with discharging tax liens. Our network has the ability to filter pros with this exact type of experience. You can visit this link here to view the pros with lien discharge experience, or you can start your search below and apply the applicable filters for your problems (for example, tax liens) and/or desired solutions (for example, lien discharge).