By: Alison Gadoua
We cannot support our family in our current home but cannot sell it because of the IRS lien.” Have you ever heard such frustration/ dejection by a family facing Internal Revenue Service (“IRS”) debt and a very tight financial budget? They theorize that they can live more inexpensively month-to-month if they could only sell their house and get out of paying its high costs. However, the IRS liens prevent them from doing so.
The family’s frustrations and conclusions are unfounded, and the real estate can be sold without satisfying the IRS lien. See the section below on Lien Discharges.
The IRS Lien
An IRS lien filing is a daunting challenge for many individuals and businesses. If your client (the “Taxpayer”) owes money to the IRS, then it is very likely that the IRS has filed or will file a Notice of Federal Tax Lien (“NFTL”) against your client to secure the debt.
An IRS lien filing is a daunting challenge for many individuals and businesses. If your client (the “Taxpayer”) owes money to the IRS, then it is very likely that the IRS has filed or will file a Notice of Federal Tax Lien (“NFTL”) against your client to secure the debt.
In order for the IRS to have an effective lien on the Taxpayer’s property, the county and name must match. That is, the NFTL is effective only on property of the Taxpayer in the county in which the NFTL is filed. In some instances, the IRS will (as they should) file the NFTL in multiple counties knowing that the Taxpayer had properties in multiple counties. Note that a NFTL against a Taxpayer does not impact real property in the name of an LLC or corporation owned in whole or in part by the Taxpayer.
A common misconception is that the IRS NFTL appears on an individual’s credit report. In years past, this was true. However, in April 2018, IRS NFTLs were no longer reported to the credit bureaus.
The IRS will advise taxpayers of the filing of a NFTL via certified mail to the taxpayer’s last known address. However, if one is uncertain whether or not a NFTL has been filed, they can check their IRS transcripts or do a title search at the county clerk’s office.
IRS Release of Lien
The fastest way to have the tax lien released is to pay your debt in full. IRS liens are self-releasing which means that the IRS lien will automatically be released within 45 days of the debt being paid in full. A Certificate of Release of Lien will then be mailed to the county clerk’s office where the lien was filed to be recorded and removed from the taxpayer’s record.
A lien discharge is one of many avenues available to taxpayers dealing with the weight of an IRS lien
If a taxpayer is in the process of selling a property that is encumbered by an IRS lien and there will be sufficient proceeds from the sale to satisfy the lien, then a lien payoff letter should be obtained from the IRS. You can obtain a lien payoff letter by contacting the Centralized Lien Operation unit at 800-913-6050. It is important that the payoff figure is calculated through the date of the scheduled closing or even a week after the scheduled closing date to provide a little extra cushion in case of delays. The IRS will typically provide the payoff letter the same day it is requested. The payment for the IRS will be issued at closing and should be sent to the IRS along with a copy of the payoff letter to the address at the bottom of the letter. The lien will then be released within 30 days after the IRS receives the payment and the Certificate of Release will be sent to the county clerk’s office where the NFTL was originally filed. Alternatively, an immediate Certificate of Release of the lien can be obtained by visiting a local IRS office that can accept the payment.
IRS Lien Discharge Request
The IRS will discharge a property from its lien if you agree to pay the IRS the value of their interest, which may at times be $0.1 A discharge does not remove the lien from the taxpayer. Rather, the discharge removes the lien from a specific property so that the new owner can receive the property free of the IRS lien.
Form 14135, Application for Certificate of Discharge of Property from Federal Tax Lien, is utilized to secure lien discharges. The form requires you to provide supporting documentation proving that there is no leftover equity (after payment of mortgages and debt having priority over the IRS, as well as closing costs) for the IRS. Let us break down what supporting documents are needed in your submission for an IRS lien discharge request and why they are needed.
Sales Contract. This requirement is an obvious one as you cannot request a lien discharge on a property without proof that there is an active deal on the table! The IRS is also looking to confirm that the buyer of the property being sold is unrelated to the taxpayer. Be sure to provide any amendments that have been made to the original sales contract with your submission.
Deed of Property Being Sold. Providing the Deed to the property being sold is a requirement in your lien discharge request package as it provides proof that the taxpayer is the current and rightful owner of the home and provides the full legal description of the property so that the IRS can independently value the property.
Settlement Statement (formerly known as the HUD-1). The settlement statement, at the time of submission, will be in draft form. This document is crucial for the IRS as it breaks down, in detail, all of the settlement costs needed to close on the property and outlines what proceeds the IRS will receive from the sale. Often, the professionals involved in the purchase and sale of the property are hesitant to provide a draft settlement statement as it requires an additional title search some 30–60 days prior to actual closing. It sometimes takes a little finessing to ease their concerns but the most important message you need to convey to these professionals is that it is crucial not to overstate what the IRS will receive.
Comment. You can (and should) build in an amount for your fees for handling the lien discharge request to the draft settlement statement so long as the IRS deems the amount “reasonable.” Your fees must be related only to the services in securing the discharge and must be paid out of the closing proceeds.
Appraisal of Property Being Sold. Submitting a formal appraisal with your lien discharge request provides proof to the IRS that the sales price on the sales contract is fair. In order for the IRS to agree to release this property as security on their debt, they need to know that you are not undervaluing the property. In addition to the appraisal, the IRS requests that you send a county valuation of the property, an informal valuation of the property by a disinterested third party, or a document showing the proposed selling price if the property is being sold at auction. Comment. If you are in a time crunch and are unable to obtain a true appraisal by the time you submit the lien discharge package, you can submit the request anyway! In this case, I recommend submitting a “comp sale” report prepared by a realtor who is not directly involved in the sale of the home.
In addition to the “comp sale” report, we recommend submitting the most recent real estate tax bill as well as the county equalization table for the property being sold. The property tax bill will reflect the net taxable value of the property being sold. Dividing the taxable value by the equalization rate will yield the county’s interpretation of the property’s fair market value (“FMV”). For example, a property with a taxable value of $200,000 and an equalization rate of 80% would have a FMV of $250,000 (200,000 divided by 0.8). We have found success in submitting these documents in lieu of the appraisal, which allows the IRS to begin reviewing the request package. However, be prepared to follow up with a true appraisal while the lien discharge request package is under review as the IRS will usually require this.
Title Report. The Title Report is the lien/judgment search discussed earlier in this article. The title agency that is involved in the sale of the property will obtain this report which will show all encumbrances on the property. The IRS is looking to ensure that debts you claim as being senior to that of the IRS are clearly indicated as such on the title report.
Mortgage & Senior Lien/Judgments Payoff. If there is an existing mortgage on the property that was obtained prior to the filing of an IRS lien, the mortgage balance will be paid in full at the time of the sale. One of the line items on the draft settlement statement is saved for the mortgage payoff so that it is captured in the overall calculation of the proceeds left over in the transaction. You will need either an official payoff letter from the mortgage company or a recent mortgage statement that shows the current balance of the mortgage. This mortgage balance/payoff figure MUST match what is listed on the draft settlement statement. If there is more than one mortgage on the property, you will need to obtain this same documentation for each existing mortgage and submit it with your request. In addition, if there are any other liens/judgments that were filed prior to the NFTL, you would need to provide payoffs for those in your submission as well.
Copy of the Federal Tax Lien. You may be thinking, cannot the IRS look up their own lien? I am sure that they could, but it is a required supporting document as per Form 14135. If you do not have a true copy of the NFTL, you can just refer the IRS to the Title Report as the lien will be listed there.
The Cover Letter and Logistics
So, now that you have your completed form and all supporting documentation that is required you would assume you are ready to submit your lien discharge request package to the IRS, right? Wrong! Well, you could go ahead and submit, but we have heard directly from IRS agents at our local IRS Advisory office that they very much appreciate our detailed cover letter that we submit along with our request. This cover letter reiterates all of the information that can be found on Form 14135 as well as the supporting documents but provides all of this in one clear and concise letter, which computes the ultimate payment that will be made to the IRS upon the sale.
Our cover letter provides the full details behind the disbursements/adjustments of the transaction and deducts those disbursements/adjustments from the net sales price to further show the IRS exactly what proceeds will be left over for the IRS, if any. If you wish to request an expedited discharge, state so in your cover letter. The bottom line is: the more complete and detailed your original submission is, the faster you receive a response from the IRS.
Having a knowledgeable representative with a proven track record assisting taxpayers in determining which avenue will work best to combat the IRS lien is truly essential.
IRS Publication 4235 provides the address and telephone/fax numbers for the centralized unit within the IRS that handles the assignment of your lien discharge request. You cannot submit your request package directly to your local IRS Advisory office. We recommend submitting your request via facsimile, rather than mailing, to the centralized unit. Their fax number is 844-201-8382. After submitting your request, the centralized unit will typically assign your request to the local IRS Advisory office within several days of receiving your request. Your request will be assigned to an IRS agent within the local office who will review and verify the information provided and determine whether a Certificate of Discharge should be issued. Our standard practice is to contact our local IRS Advisory office within 10 days of submission of the discharge request to the centralized unit to see who has been assigned.
Next Steps After Making a Lien Discharge Request
The agent assigned will usually contact you with any questions they have on the request submitted and/or may request additional information/documentation to support your request. If everything in your request is in order, the agent will send you a Letter 403, which is the Conditional Commitment to Discharge Certain Property from Federal Tax Lien (“Conditional Commitment”). This Conditional Commitment letter confirms that the IRS will discharge their lien so long as they receive proceeds that are not less than what is reflected on the draft settlement statement. This is why we mentioned above how important it is to not overstate the IRS proceeds on the draft settlement statement. This letter will also clearly state that the seller(s) of the property is to receive NO proceeds from the sale of the property. Moral of the story … the IRS wants (and is entitled to) every leftover penny of that sale to apply to the tax debt in excess of senior liens and closing costs.
Due to the nature of real estate sales, the IRS works through these cases quickly. Our experience is that they turn the cases around within 30 days of our providing a complete package. However, the IRS has 45–60 days to respond to your request.
The Conditional Commitment letter is valid for 30 days. However, the IRS may extend or renew the Conditional Commitment if appropriate supporting documentation is submitted that meets the criteria for renewal or extension. In a recent case at our firm, the sale of a property was delayed due to an underground oil tank that had to be removed from the property. The IRS agent assigned to our matter provided an additional three weeks for the tank to be removed and for the sale to be completed. After the closing takes place, you will need to send full payment of the proceeds of the sale to the IRS along with a copy of the deed or other document showing that the taxpayer is divested of rights, title, or interest in the property and a copy of the final settlement statement for the transfer of the property. The payment is required to be in the form of a check. You cannot wire the sale proceeds to the IRS. The IRS will apply the payment in a manner that is in the best interest of the IRS, which is usually the debt of the oldest tax period. You cannot direct the funds to be applied elsewhere.
If you are unable to complete the sale within 30 days and do not request an extension of time from the IRS agent assigned, the IRS Advisory office will deny your discharge request. If your request is denied, you will receive a letter from the IRS explaining why the discharge request was denied and providing you with a Form 9423, Collection Appeal Request, allowing you to appeal the denial. Alternatively, you can request to speak to the Advisory Manager in the local office to see if you can come to a resolution without having to go to IRS Appeals.
Lien Discharge with Zero Proceeds for the IRS
But what happens if there are no proceeds leftover for the IRS after all allowable expenses and senior encumbrances are paid at the sale? Will the IRS still provide approval for a request to discharge their lien? Yes! You may be wondering why the IRS would agree to anything if there were nothing in it for them. Well, they have to! Code Sec. 6325(b) (2)(B) provides that a discharge can be issued when it is determined that the government’s interest in the property has no value. Often, a taxpayer can no longer afford their home and getting out of that mortgage payment could allow the taxpayer to increase the amount of their monthly payments to the IRS if they are in an existing installment agreement. This is not a requirement for the lien discharge but helps to “sweeten the deal.”
Conclusion
A lien discharge is one of many avenues available to taxpayers dealing with the weight of an IRS lien. Having a knowledgeable representative with a proven track record assisting taxpayers in determining which avenue will work best to combat the IRS lien is truly essential.
For more information, please see IRS Publication 783, which further details how to apply for a Certificate of Discharge from Federal Tax Lien.
As originally published in CCH’s Spring 2025 issue of the Journal of Tax Practice & Procedure and the Journal of Tax Practice & Procedure.
