A Federal tax lien is the legal claim of the government against a taxpayer’s properties and assets when they fail or neglect to pay their tax debt. Generally, it exists when the Inuenternal Reve Service assesses your liability and sends you a Notice and Demand for Payment—a bill that explains the amount of your tax debt.
On top of that, a lien also occurs when you refuse to fully pay your owed taxes on time Furthermore, the IRS files a Notice of Federal Tax Lien, to give you a tip-off that the government has a legal claim against your property. If you want to understand more about the lien, read on and know the essential steps on how to discharge a Federal tax lien.
What is IRS Lien Discharge
Once the IRS places a lien against your property, it could reflect on your public record and the consequences are extensive. Your property is in serious jeopardy of being taken away under your name. With that, it could be more difficult to sell your assets and vendors may be reluctant to talk business with you. On top of that, an IRS lien can also affect your credit rating significantly.
If you want to get away with this nightmare, there are ways to do it when you can’t afford to pay your entire tax debt in just one payment—an IRS lien discharge is one of the few. IRS lien discharge means that the agency removes the lien from an asset. If you apply for a lien discharge and the agency grants your application, you can refinance or sell the property explicitly named in the certificate.
Without the lien discharge, the buyer of your asset takes it subject to the lien. If an individual purchases your home, they won’t be the one who will pay for the taxes you owed. However, the IRS could still be able to take the asset under lien. In turn, the tax lien will chase away any potential buyers because no one would want to have problems regarding the transfer of property due to your tax issues.
How to Apply for IRS Lien Discharge?
When you’re applying for an IRS lien discharge, the first thing you need to do is to submit Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien) for at least 45 days before the loan settlement or sale meeting. To help you with the application process, you may refer to Publication 783 which contains instructions on filling out the form.
Aside from answering all the questions on form 14135, it is also vital to attach readable copies of the pertinent documents required in applying for a lien discharge. Generally, incomplete applications may delay the decision of the IRS. Furthermore, sections 1,2, and 3 of Form 14135 are self-explanatory.
Meanwhile, if you’re applying for a discharge through a representative, you must fill in section 4 and make sure to indicate who is being represented. In addition, you must also attach Form 2848 (Power of Attorney and Declaration of Representative) if you want to hire someone to speak on your behalf.
What Happens After IRS Discharges a Tax Lien?
When the IRS discharged a tax lien from your property, you will receive a Certificate of Discharge. However, it can only be applied to the asset named in the certificate. There are two things that won’t be affected when you receive a lien discharge, these are:
- The IRS tax lien will still cover all assets other than the property named exactly in the lien discharge.
- You will still owe your back taxes, including any interests and penalties to the Internal Revenue Service.
As such, a federal tax lien discharge can still give you an advantage. You may sell your home much easier and use the money to pay off your owed tax in full. Or, you may do a cash-out refinance of your property and use the cash to start making payments on an IRS installment agreement.
When Will IRS Grant a Tax Lien Discharge?
The IRS will grant a tax lien discharge on a particular asset or property with good reason. As such, the agency will provide a Certificate of Discharge based on the following circumstances:
- When you have paid an amount equal to the lien interest in the asset being discharged. The interest of the IRS may be less than the value of your asset because other creditors may have greater interests than the IRS tax lien.
- When the value of your other asset subject to the IRS tax lien is worth twice as much as your federal tax liability.
- When a third party who owns property subject to your tax lien provides a deposit or bond equal to the lien interest of the IRS. Such a person must file an action in the district court appealing the lien interest within 120 days.
- When you agree to dispose of your asset and hold the funds subject to the IRS tax lien in escrow. Then, you can utilize the sales proceeds to pay off a creditor, such as a mortgage lender, with superior interest to the IRS. However, the rest of the funds have to be kept in escrow subject to the IRS tax lien.
- When you can establish that the IRS tax lien interest in your asset has no value. The IRS may discharge a lien if the amount you owe to your mortgage lender is more than the actual worth of your property under lien.
Primary Reasons Why a Debt may be Discharged
As stated above, there are certain circumstances that allow a property lien to be discharged. When a lien of a specific asset gets discharged, it will be deleted in the records kept by the county recorder’s office or on the title report. Hence, the property can be sold much easier since the title is now clear and will no longer have an encumbrance.
There are three primary reasons why a lien may be discharged, these include:
- Discharge by Payment: If a tax debt is fully paid, the lien of a particular asset will be officially discharged. This usually exists when the asset is sold greater than the owed amount or if the landholder agreed to pays off the debt through an installment over a certain period of time. Once the lien is satisfied through this approach, you must request a written confirmation from your creditor stating that the debt has been paid off. On top of that, you must also file it with the county recorder’s office, so that title of your specific property becomes clear and marketable.
- Discharge by Expiration: Tax liens of a particular asset may have to be paid off within a specific period of time. If that time expires before a creditor renews the lien, the lien will no longer be considered a hindrance to the asset. The expiration of a lien may vary from each state.
- Discharge by Debt Forgiveness: In extremely rare circumstances, a creditor may opt not to collect on the debt and will absolve you from the obligation to pay off the loan. Just like the discharge by payment, you must also receive a written confirmation from your creditor stating that the debt has been discharged. On top of that, the confirmation must also be filed with the county recorder’s office, so that title of your specific property becomes clear and marketable again.
How do I get an IRS lien release?
The fastest and easiest way to get a tax lien released from a taxpayer’s property is to pay your tax debt in full. Once you have paid off the taxes you owe, the IRS will release a tax lien within 30 days as directed by Section 6325 (a) of the Internal Revenue Code.
How long does an IRS lien last?
Once you have failed to pay the taxes you owe after you have received a Notice and Demand for Payment from the IRS, you will face a federal tax lien on your particular asset. This lien will last for a minimum of 10 years. However, you may file for an IRS lien discharge if you wish to remove a lien from your asset sooner than its expiration.
Can IRS lien be subordinated?
Yes! You will need to provide a basis so the IRS will subordinate the lien. The agency will only agree to the lien subordination if it is in their best interests. As such, a tax lien may be subordinated if you agree to pay the IRS an amount equal to the interest they are subordinating.
Furthermore, if you’re still facing tax issues after receiving an IRS tax lien discharge, it is best to talk to a lawyer or tax professional to discuss important matters. The Internal Revenue Service tax lien and the taxes you owe won’t go away unless you will pay your tax debt in full or at least you come up with a plan to get tax relief.