What Is Discharge of Tax Lien?

A discharge of tax lien is a process by which the IRS removes a federal tax lien from a specific property, allowing the taxpayer to sell, refinance, or use the property as collateral without the lien encumbering it. While the lien itself remains in place on other assets until the underlying tax debt is fully satisfied, a discharge provides flexibility for taxpayers who need to access or transfer the property tied to the lien. This process is particularly useful when selling an asset, obtaining financing, or resolving tax liabilities in a way that benefits both the taxpayer and the government. The IRS evaluates discharge requests based on specific eligibility criteria outlined in Section 6325(b) of the Internal Revenue Code, ensuring that its financial interests are protected while enabling taxpayers to manage their obligations effectively.

How Does Discharge of Tax Lien Work?

When a federal tax lien is recorded against your property due to unpaid taxes, it can severely limit your ability to sell or refinance the property. A discharge removes the lien from that specific asset while keeping it attached to other properties or assets you own. This allows you to proceed with transactions like sales or loans involving the discharged asset.

Eligibility for Discharge

The IRS may approve a discharge under these conditions:

1. Sufficient Remaining Value: The remaining property under the lien has at least twice the value of your total tax liability and other debts secured by liens.
2. Partial Payment: You pay an amount equal to the IRS’s interest in the property.
3. No Value: The property has no equity or value for IRS recovery (e.g., underwater mortgages).
4. Escrow Agreement: Sale proceeds are placed in escrow for IRS claims.
5. Deposit/Bond: You provide a deposit or bond equal to the value of the lien.

How to Apply for a Discharge of Tax Lien?

To request a discharge, you must complete IRS Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien) and provide supporting documentation. Here’s how:

1. Download Form 14135: Obtain it from the IRS website.
2. Complete All Sections: Include details about yourself (or your business), the property, and why you’re requesting a discharge.
3. Attach Supporting Documents:
   • Proof of ownership (e.g., deed).
   • Appraisal reports showing property value.
   • Settlement statements if selling.
   • Escrow agreements if applicable.
4. Submit Your Application: Mail it to the IRS Advisory Group office assigned to your area.

Step-by-Step Guide to Completing Form 14135

Section 1: Applicant Information

• Enter your name, address, and contact information.
• Include your Social Security Number (SSN) or Employer Identification Number (EIN).

Section 2: Property Description

• Provide detailed information about the property (e.g., address, legal description).
• Attach supporting documents like deeds or titles.

Section 3: Reason for Request

• Select one of five reasons for discharge eligibility (e.g., partial payment, escrow agreement).
• Provide an explanation if necessary.

Section 4: Lien Details

• List details about the federal tax lien(s), including dates and amounts owed.
• Attach copies of notices if available.

Section 5: Proposed Payment or Agreement

• Specify how you intend to satisfy IRS requirements (e.g., payment amount, escrow terms).

Section 6: Declaration

• Sign and date your application under penalty of perjury.

Benefits of Discharge of Tax Lien

1. Sell Property Freely: A discharge allows you to sell an asset without transferring its lien obligations to buyers.
2. Access Financing: Use discharged property as collateral for loans or refinancing.
3. Resolve Tax Debt Strategically: Manage your tax liabilities while maintaining financial flexibility.

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