How to Sell or Refinance a Home With an IRS Lien

When a tax debt remains unpaid, the Internal Revenue Service (IRS) can establish a federal tax lien against a taxpayer’s assets. This legal claim secures the outstanding tax liability. A lien complicates selling or refinancing property, impacting its marketability and the ability to transfer clear title. Understanding specific IRS processes is necessary to navigate property transactions with an existing federal tax lien. This article outlines pathways for taxpayers to sell or refinance their homes when a federal tax lien is present.

Understanding Federal Tax Liens

A federal tax lien is the government’s legal claim against a taxpayer’s property for unpaid tax debt. This claim is authorized by Internal Revenue Code Section 6321. The lien arises automatically when the IRS assesses a tax liability, sends a Notice and Demand for Payment, and the taxpayer does not pay within 10 days. Once established, the lien attaches to all of the taxpayer’s current and future assets, including real estate, personal property, and financial assets.

To provide public notification, the IRS files a Notice of Federal Tax Lien (NFTL) in public records, often with the county recorder’s office. The NFTL is a public document that alerts creditors and the public to the government’s existing legal right to the taxpayer’s property. The NFTL protects the government’s priority interest against other creditors.

A federal tax lien creates obstacles for property transactions like selling or refinancing. The lien provides the IRS with a priority claim, impairing the property’s marketability and making it difficult to obtain clear title. This impacts the ability to secure new financing or transfer ownership.

Obtaining a Discharge of Property from Federal Tax Lien

A discharge of property from a federal tax lien removes the lien from a specific asset, such as a home, allowing it to be sold with clear title. The federal tax lien remains attached to the taxpayer’s other property. This process is used when a taxpayer intends to sell a specific property and needs to transfer ownership free of the federal encumbrance.

The IRS may grant a discharge when it serves the government’s best interest. This includes situations where sale proceeds are equal to or greater than the property’s fair market value and will satisfy the IRS’s interest. A discharge may also be considered if the IRS’s interest in the property is worthless, such as when prior encumbrances exceed the property’s value. The IRS might also approve a discharge if the property is sold and proceeds are held in an escrow account subject to the lien.

To apply for a discharge, a taxpayer must gather specific information and documentation. This includes the sales contract, a proposed settlement statement, property description, and current appraisal or other evidence of fair market value. Details of all existing prior encumbrances, such as mortgages, are also required. This information is used to complete Form 14135, “Application for Certificate of Discharge of Property from Federal Tax Lien,” which outlines the basis for the request.

The completed Form 14135 and supporting documents should be mailed to the IRS Advisory Consolidated Receipts office. Taxpayers should submit their application at least 45 days before the scheduled transaction date for sufficient IRS review time. If approved, the IRS issues a “Certificate of Discharge of Property from Federal Tax Lien,” which removes the lien from the specified property, enabling the sale to proceed.

Obtaining a Subordination of Federal Tax Lien

Subordination of a federal tax lien means the IRS agrees to lower its lien’s priority relative to another lien, such as a new mortgage. This process is used when a taxpayer seeks to refinance an existing loan or obtain new financing for property with a federal tax lien. By subordinating its claim, the IRS allows the new lender to have a first-priority claim on the property, which facilitates financing.

The IRS grants subordination when it determines it is in the government’s best interest. This includes situations where the action will increase the amount recoverable by the U.S. government. This can occur if a new loan allows the taxpayer to pay down tax liability, or if a lower interest rate on a refinanced loan frees up funds for increased payments toward the tax debt.

To apply for subordination, taxpayers must compile specific details and documents related to the proposed new loan. This includes the new loan amount, terms, lender’s information, and a current property appraisal or valuation. Existing mortgage information and the taxpayer’s financial statements are also required. This information is used to complete Form 14134, “Application for Certificate of Subordination of Federal Tax Lien.”

The completed Form 14134 and supporting documentation should be mailed to the IRS Advisory Consolidated Receipts office. Submit the application at least 45 days before the anticipated refinancing or loan closing date for adequate processing time. If approved, the IRS issues a “Certificate of Subordination of Federal Tax Lien,” allowing the new loan to be secured with a higher priority than the federal tax lien.

Other Lien Resolution Pathways

Beyond discharge and subordination, other avenues exist for resolving a federal tax lien. These include the withdrawal of a Notice of Federal Tax Lien and the complete release of the federal tax lien. These options can facilitate financial stability and property management.

Withdrawal of Notice of Federal Tax Lien

A withdrawal of a Notice of Federal Tax Lien (NFTL) removes the public notice of the lien, making it appear as if the NFTL was never filed. The underlying federal tax lien remains in place until the tax debt is satisfied or becomes legally unenforceable. The purpose of a withdrawal is to remove the public record of the lien, which can improve a taxpayer’s credit score and alleviate barriers to financial transactions.

The IRS may withdraw an NFTL under specific conditions. These include instances where the NFTL filing was premature or not in accordance with IRS procedures. Withdrawal may also be granted if the taxpayer has entered into an installment agreement to satisfy the tax liability, or if the withdrawal will facilitate tax debt collection. Another condition is when withdrawal is determined to be in the best interest of both the taxpayer and the government.

To request a withdrawal, taxpayers use Form 12277, “Application for Withdrawal of Filed Notice of Federal Tax Lien.” This form requires identifying information and an explanation of which condition for withdrawal applies. The application is submitted to the IRS Advisory Group. If approved, the IRS files a notice of withdrawal in the same office where the original NFTL was filed.

Release of Federal Tax Lien

A release of a federal tax lien completely removes the government’s legal claim from all of the taxpayer’s property. This occurs when the tax liability has been paid in full, becomes legally unenforceable (e.g., due to the expiration of the collection statute of limitations), or when a bond is accepted by the IRS to secure payment.

The IRS automatically issues a “Certificate of Release of Federal Tax Lien” within 30 days after the tax liability is satisfied. This certificate is filed in the same public recording office where the original NFTL was filed. Once released, the lien no longer attaches to any of the taxpayer’s property, allowing for unrestricted sales or refinances.

If a taxpayer qualifies for a release but has not received the certificate, they can contact the IRS. Requests can be made in writing to the Centralized Lien Operation or the Collection Advisory Group. While the release removes the lien, the public record of the NFTL may still exist; a separate withdrawal request can address this if desired.