When taxpayers have unpaid debts owed to the Internal Revenue Service (IRS), the IRS can place a lien, or claim, on all of the taxpayers' property. Given the severity of a lien, taxpayers understandably think of them as all-or-nothing situations. However, there are ways taxpayers can reduce a lien's impact, even if they haven't yet resolved the debt. Let's discuss a couple of options that you may have if you have a tax lien on your property.
How to Apply for a Certificate of Discharge
Under the IRS tax code, taxpayers can apply for a certificate of discharge. Discharge removes the United States' liens from the named property before you've satisfied the entire debt. Taxpayers qualify for a certificate of discharge for several reasons, such as:
- If the value of the property is more than twice the amount of the tax debt and other property debts (e.g., state and local taxes owed, a mortgage, mechanic's liens)
- If the taxpayer sells the property and pays part of the amount due, and the remaining debt is worth less than the property's value (typically, the IRS expects one of half of the sale's proceeds)
- If other debts are senior to the tax lien and have a value greater than the market value of the property, so the government's claim has no value
- If the IRS agrees that the property can be sold, giving the IRS a specified priority for proceeds of the sale
- If a third party owns the property, who posts a deposit or bond in the amount owed to the government
To be granted the certificate, taxpayers can file an application requesting a certificate. The application must explain the reason for the discharge, as well as provide information identifying the taxpayer, the taxpayer's attorney/representative, the lender/financier, and, if relevant, the property's new owner or transferee.
Additionally, the taxpayer must provide information relating to the property, including its description, current valuation, title information, sales or escrow agreements, and other relevant materials.
The IRS asks for applications to be submitted at least 45 days before the date needed to complete any requisite transaction.
How to Request a Certificate of Release
If you have paid a tax debt in full, or if the debt has become legally unenforceable, then the government must release the tax lien within 30 days. The same IRS that placed the lien on your property should automatically mail you a copy of the certificate of the release.
If 30 days have passed and the IRS hasn't released the lien, you can submit a written request to release it.
In the request, you must include the date, your name, address, and phone number (with the best time to call). You must also provide copies of the notices of the federal tax liens you want to be released and an explanation of why the lien should be released. If the lien should be released because you have paid the debt, you should send the canceled check or other proof of payment.
The IRS warns that it can take time to process your request. If you have an immediate need for a certificate of release, you can call or go to an IRS local office for assistance. (Bring the documentation proving you've satisfied the debt with you when you do so.)
How a Lien Notice Withdrawal Works
There is another option, especially for those still working to pay off their tax debt. In some cases, the IRS will agree to remove the notice of a lien from the property.
Removing the notice of the lien does not impact the lien—it remains in place until you pay the debt in full (or the time allotted for repayment has expired). But if the IRS agrees to remove the notice, then creditors and others won't know that the lien is in place. Your debt basically becomes a private “IOU” between you and the IRS. In doing so, the IRS gives up its right to be a secured creditor; it won't compete with other creditors for your assets.
Though removing the notice doesn't reduce the debt, it can help you get on better financial ground while you pay off that debt. (For example, if you want to get a job that requires a professional license, but you can't get a license without a clean credit record, removing the notice should remove the lien from your credit report.)
To qualify for removal of the notice, you apply for withdrawal of the notice using Form 12277. The application is short—just one page—but the requested information is vital. After providing the basic information relating to your identity and the lien itself, you must provide a reason why the IRS should remove the notice. There are four reasons why a taxpayer is eligible for the removal:
- The notice was filed prematurely or otherwise incorrectly
- The taxpayer and IRS agreed to an installment payment plan, and the agreement didn't include the IRS' filing of a notice of lien
- The withdrawal of the notice will help the taxpayer pay the amount due
- The withdrawal is in the best interest of the government and taxpayer
If the application is granted, the IRS will notify you of the removal. If the application is denied, you can appeal the decision.
If you are concerned that the IRS may put a lien on your property, or if it already has placed a lien, contact an attorney who specializes in tax law to help you. Don't wait. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.
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