Discharge of Federal Tax Lien & Using IRS Form 14135

A federal tax lien is a claim against your property held by the IRS. If you don’t pay a tax bill by its deadline, the IRS automatically gets a lien interest in all of your real and personal property.

Eventually, the IRS may file a Notice of Federal Tax Lien (NFTL) in an office of public records, such as a county recorder’s office. The NFTL may prevent you from selling your home, refinancing your mortgage, or using your home as collateral for a loan.

What is a Certificate of Discharge?

A Certificate of Discharge removes the IRS lien from a specific piece of property, such as your home. A lien discharge can be helpful in the following situations:

1. You are trying to sell your home or another asset, and you need to remove the lien to ensure the buyer will complete the transaction.
2. You are refinancing your home. You need to discharge the lien to ensure the mortgage lender’s interest is higher than the IRS to get approved.
3. You are using your home as collateral for a loan.

In some cases, you could instead request a tax lien subordination. A subordination allows a new creditor to move ahead of the IRS lien in priority, but the lien remains in place.

What Happens When a Tax Lien is Discharged?

The tax lien will no longer encumber the discharged property. However, the federal tax lien remains in effect on all of the rest of your property, and you are still responsible for paying your IRS taxes owed.

The lien discharge may allow you to avoid a foreclosure. It could also make it easier to use other tax resolution strategies.

You can use the proceeds from a home sale to pay off your taxes owed or use the savings from a loan refinance to make installment agreement payments.

Because the IRS is giving up its lien interest in your asset, the IRS will only grant discharges in certain situations.

How to Request a Tax Lien Discharge

Use Form 14135 to apply for a tax lien discharge. You’ll need to provide the IRS with detailed information about yourself and the property. Refer to IRS Publication 783 for detailed instructions on completing this form.

Be aware that you should submit your application to the IRS at least 45 days before your sale or loan settlement meeting. The 45 days will give the IRS enough time to process your request without delaying your transaction.

Talk to a tax professional if you need assistance completing this form.

Completing Form 14135

Be prepared to include the following information on Form 14135:

1. Your personal information: Be sure to enter the information as it appears on the Notice of Federal Tax Lien.
2. Your representative’s information (attach Form 2848, Power of Attorney)
3. Information about your lender or finance company
4. A description and appraisal of the property

You can also attach the following documents to your application:

1. A copy of your Notice of Federal Tax Lien
2. The sales contract/purchase agreement
3. Title report
4. Closing statement
5. Any additional information that has a bearing on your request

Basis for Lien Discharge

Section 7 of the application requires you to provide a basis for discharge. The IRS generally only agrees to discharge a lien when you compensate them for this action, or when the lien discharge does not negatively impact the ability of the IRS to collect your taxes owed.

There are only five reasons the IRS will consider granting a lien discharge:

1. The value of your remaining property subject to the IRS lien is at least twice the value of your tax liability plus any senior encumbrances. Because you have other valuable property that will continue to be encumbered by the tax lien, the IRS may feel secure discharging the lien from one asset.
2. You pay the IRS an amount equal to their lien interest. You can calculate the value of the IRS lien interest by taking the selling price of your property and subtracting the value of any seniors liens, such as your first mortgage lender’s lien.
3. The IRS lien interest has no value. For example, an asset can have no value when you have an underwater mortgage. The senior lienholder’s interest is worth more than the property’s value, leaving no value for the IRS to claim.
4. You agree to hold the sales proceeds in escrow, subject to the same liens and in the same priority as the property was. You will need to submit a copy of the proposed escrow agreement with your application.
5. You make a deposit or bond equal to the government’s interest in the property. This option is only available to a third-party who owns the property subject to the lien.

The IRS will also discharge property subject to an Estate Tax Lien. To discharge for an Estate Tax Lien, you will need to use IRS Form 4422.

Mail your completed Form 14135 to the IRS office assigned to the location defined in IRS Publication 4235 based on the location of the property.

Contact a tax professional for help completing your lien discharge application and resolving your tax problems.