A federal tax lien is a legal claim by the IRS on your property due to unpaid taxes, affecting all your assets, including real estate and personal property. When the IRS files a lien, it attaches to all existing and future assets you own, complicating property sales or transfers. A discharge of property from a federal tax lien is a formal process that allows you to remove the lien from a specific property, so you can sell or transfer it without the IRS’s claim interfering with the transaction.
Why You Might Need a Discharge
If you owe back taxes and the IRS has placed a lien, selling or transferring property becomes difficult because the title shows the IRS’s claim. Buyers and lenders generally avoid properties with federal tax liens due to the potential for the IRS to collect its debt first. A discharge lets you isolate one property from the lien, clearing the way for sale or mortgage, even though your overall tax debt and lien on other assets remain.
Applying for a Discharge
To request a discharge, you must submit IRS Form 14135, “Application for Discharge of Property from Federal Tax Lien.” The form requires detailed information about the property, sale or transfer terms, and how the proceeds will be used to pay the tax debt. You’ll also need to provide supporting documents such as purchase agreements, escrow instructions, property appraisals, and information about existing mortgages or other liens.
The IRS considers factors like whether the discharge protects its interest or aids in collection. Common grounds include:
- Payment of IRS interest: Using sale proceeds to pay the lien balance or an amount equal to the government’s interest.
- Property worth exceeds the lien: Ensuring the government’s claim remains secure through other property or assets.
- Lien interest is valueless: Cases where senior liens fully encumber the property, leaving no value for the IRS.
- Substitution of proceeds: Sale proceeds are held in a fund or trust that remains subject to the lien.
If the IRS approves, they issue a Certificate of Discharge, which you record with the appropriate local office (e.g., county recorder for real estate). This clears the title for that property transfer.
Who is Affected
Anyone with substantial unpaid federal taxes may face a federal tax lien. This includes individuals, small business owners, and property owners. Because the lien attaches to all property and rights to property, it complicates asset sales and loan financing until addressed. Potential buyers and lenders are also affected since liens cloud the property’s clear title.
Tips for Managing the Discharge Process
- Start Early: The process can take weeks or months, so begin well before a planned sale.
- Organize Documentation: Include property descriptions, appraisals, sale agreements, and mortgage statements.
- Get Professional Appraisals: Accurate property value helps the IRS assess their interest.
- Be Precise in Applications: Clear, complete forms reduce delays.
- Consult Experts: Tax professionals can guide you through IRS procedures and improve your chances of success.
Common Misunderstandings
- A discharge only removes the lien from a specific property, not the entire tax debt.
- It differs from a lien release, which removes the lien from all assets, generally after full payment or settlement.
- Obtaining a discharge requires meeting strict IRS criteria and is not guaranteed or quick.
Federal Tax Lien vs. Levy
| Feature | Federal Tax Lien | Federal Tax Levy |
|---|---|---|
| What it is | Legal claim on your property securing tax debt | Seizure of property to satisfy tax debt |
| Effect | Public notice of claim | Actual taking of assets (bank accounts, wages, property) |
| Purpose | Secure government interest | Direct debt collection |
| Timing | Filed after notice and demand, before active collection | Happens after lien if debt remains unpaid |
| Action | Passive claim without immediate seizure | Active seizure |
| Public Record | Yes, recorded with state or county offices | Typically not public record |
Frequently Asked Questions
How long does the discharge take? From weeks to several months, depending on case complexity and IRS workload.
Does discharge remove lien from credit reports? No, the lien remains until fully satisfied and released.
Can non-sale discharges be granted? Rarely; usually tied to sales or transfers, but possible in cases where the IRS’s interest is valueless.
What if my discharge is denied? You can appeal through the IRS Office of Appeals or reapply after addressing issues.
Does discharge affect other tax debts? No, it only applies to a specific property, not your overall tax balance.
For more detailed information on federal tax liens and related IRS procedures, see our Federal Tax Lien article or the official IRS guide on Understanding a Federal Tax Lien.
