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Discharge of specific property form IRS tax lien updated 8/21/04

The IRS announced an expedited lien discharge / subordination process for financially distressed homeownersnew 12/17/08

When you owe taxes, a general tax lien automatically applies to "all your property or interest in property". The lien does not name specific property, such as the legal description in the deed of trust on your residence ("Lot 4 of Bradley Park subdivision")."Interest in property includes, e.g., a residence being purchased "contract for deed" even though the record title is not in your name.

A lien is not a specific collection action to immediately take your property. But, because the purchaser or lender takes the property subject to the tax if the tax is not paid or the lien otherwise dealt with, a lien impedes your ability to deal with your property, including selling or refinancing your residence. Although the purchaser or lender is not personally subject to the tax the IRS can seek to seize the property. Consequently, purchasers will not complete a purchase unless the tax issues are resolved.

There are times when you want to, e.g., sell your residence, but are not able to pay the tax in full. The IRS may permit the sale to proceed, take the "equity" you would have otherwise received and remove the lien from the property being sold to allow the sale to take place, while leaving the lien in place against your other property.

A discharge of a tax lien merely removes the lien from the specific property, and the lien remains in place as to your other property.

The IRS may also permit the property to be refinanced under appropriate circumstances and subordinate the lien so the lender's security interest has priority (and consequently the lender will be willing to make the loan). E.g., your equity remains the same but the payments are decreased due to a lower interest rate, thereby enhancing your ability to make installment payments to the IRS.

You must request the discharge and provide information on the value of the property, existing debt, the purchaser and purchase price. If the IRS determines discharge of the property is in the IRS' best interest (e.g., it facilitates collection) it will agree to the discharge. The IRS typically receives the funds you would have received and the purchaser acquires the property free from your tax lien. To apply for the certificate of discharge you must provide the following information:

  1. The legal description of the property.
  2. A copy of the contract for sale of the property.
  3. A copy of the tax lien.
  4. Information regarding the priority lien holder (your current lender), including name, recording information and date of the deed of trust, monthly payment, interest rate, original loan balance and current loan balance.
  5. A draft closing statement showing the costs, commissions and expenses in connection with the same, and amount to be paid to you and your wife as sellers of the property.
  6. Two appraisals of the property, one of which would hopefully be the buyers' appraisal for obtaining their loan, and the second could be a letter of appraisal from a realtor familiar with property in the area setting forth their estimate of the appropriate sales price of the property.
  7. The closing date and location for the sale of the property.

To apply for a tax lien discharge, applicants must follow directions in Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information. updated 12/17/08