Why & How to Apply for a Discharge of an IRS Tax Lien
An IRS tax lien doesn’t take money out of your paycheck or bank account, but it can still cause serious financial problems. It may prevent you from selling your property, and it can hurt your credit. You may apply for a discharge of an IRS tax lien to sell or refinance your home, but the IRS will only grant your request in certain situations.
An IRS tax lien applies to all of your property and takes effect as soon as you fail to pay back taxes after the IRS sends you a notice demanding payment. Usually, the balance threshold for issuing a levy is $10,000. The lien gives the IRS a right to your property even if it is transferred to a third party. The IRS may eventually file a notice of federal tax lien against your real property. You most likely won’t be able to sell or refinance your home subject to the lien. Therefore, your best option may be to request a lien discharge.
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.
Without the lien discharge, anyone who buys your property takes it subject to the IRS tax lien. If someone buys your home, the buyer would not be responsible for your delinquent tax debt. However, the IRS could still seize the property. The tax lien will drive away any potential buyers because they won’t want to be responsible for your tax problems.
When you apply for a tax lien discharge, you will have to show the IRS that you are willing to protect their interests. If you have several valuable assets subject to the lien, the IRS may grant a lien discharge for one piece of property.
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 this discharge only applies to the property named in the certificate.
If you receive a lien discharge, two things will not be affected:
- 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 assets named explicitly in the lien discharge.
Getting a tax lien discharged can still be a big win. You may be able to save money by doing a cash-out refinance of your home. Then, use the extra cash to begin making payments on an IRS installment agreement. Or you could sell your home and use the proceeds to pay off your entire tax debt.
If you still have tax issues after receiving a discharge from an IRS tax lien, talk to a tax professional. Your tax debt and the IRS tax lien won’t go away unless you come up with a plan to get tax relief.
How Can a Taxpayer Request a Discharge of an IRS Tax Lien?
You need to submit 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.
You will need to describe the property, its appraised value, and other information. Most importantly, you need to provide a basis for the discharge of the IRS tax lien.
When the IRS grants a lien discharge, it is doing you a favor. You need to give them a reason why they should grant your request.
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. Taxpayers may use the following as a basis for a lien discharge:
Your other property subject to the IRS tax lien is worth twice as much as your tax liability.
For example, if your total tax liability 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.
You pay the IRS an amount equal to their lien interest in the property being discharged.
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.
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.
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.
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. 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 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. A home lender may not want to give you a mortgage or refinance your existing one because the IRS would have an interest in your property that takes priority over the lender’s interest.
The IRS tax lien limits your options and makes it hard to make financial transactions. There are several ways to release or withdraw one. You’ll need to use one of these lien removal strategies if you want to be free to sell your assets or get credit.
A tax lien discharge is one method of getting rid of a tax lien on a specific piece of property you own. You can also apply for a lien subordination. A tax lien subordination allows another creditor to receive an interest in your property that is superior to the IRS tax lien. The tax lien remains in place but is second in line behind the other creditor’s interest.
You can also release a lien by paying off your tax debt in full or by meeting the terms of an accepted Offer In Compromise. Depending on your situation, you may be able to set up an IRS installment agreement to pay off your tax debt. With an installment agreement, if you meet certain conditions, you can request a withdrawal (which is not a release) after three consecutive payments.