Having a lien on your property can make it very difficult to sell the property, transfer it, or use it as collateral for another loan. If you meet certain qualifications and fill out the appropriate paperwork, you may be able to have your lien discharged. Use Form 14135 to request a lien discharge from the IRS.
Getting a lien discharged can give you the freedom to transfer the asset, sell it, and use the proceeds to pay off your tax debt or otherwise put yourself in a better position to handle your tax debt.
Understanding IRS Tax Liens
The IRS may place a lien on your property when you fail to pay your taxes. The lien gives the government a legal stake in your property, including real estate, financial assets, and any other valuable property you may have. When a federal tax lien is attached to your assets, the IRS has the rights to the proceeds from the sale of your assets up to the value of your tax debt (including penalties and interest).
The IRS doesn’t generally make a claim against your property until it has exhausted every other collection option—you’ll receive several notices before the IRS moves forward with a levy. Whenever possible, the IRS prefers to handle your past-due taxes with a payment plan or other solution first.
Once the lien is placed, what you can do with your property is severely restricted. While it may not keep you from maintaining ownership of your property and using it, you will not be able to sell it or borrow against it with a lien in place until the lien is resolved.
How a Lien May Affect Your Finances and Credit
While a federal tax lien does not show up on credit reports or affect your credit score any longer, it can still have a negative impact on your finances. Tax liens are public records, so you may have a harder time getting credit. Creditors will see that you have a federal tax lien against you, realize that you have had trouble paying your taxes on time, and consider you too risky to lend money to. Even if a lender does decide to extend credit to you, your lien may result in you having to make a larger down payment or accept a higher interest rate.
Financially, a tax lien may make it more difficult for you to tap into your property’s equity when needed. Imagine that you own a home and have $100,000 of equity in it. In most cases, as long as you have the ability to repay the loan, a lender will give you a loan against the equity in the home that you can use for home repairs, debt consolidation, or any other expenses. However, once a lien is in place and attached to your home, lenders will not be able to use the home as collateral, and thus, your ability to borrow money will be severely restricted.
That’s where a lien discharge comes into play. A discharge removes the lien from a specific asset. In this case, if you get the lien discharged from your home, you can take out a loan against your home and use it to pay off your taxes.
What is Form 14135?
IRS Form 14135, Application for Certificate of Discharge of Property from Federal Tax Lien, is a form that allows you to request that your lien be discharged from a specific property that you own. You’ll need to provide information based on the discharge, the value of the property, and other relevant information.
A lien discharge doesn’t completely eliminate the IRS’s lien on your properties. When you request a lien discharge, you are asking the IRS to remove one specific piece of property from the lien.
Eligibility for Discharging a Lien
The IRS only allows you to request a lien discharge when you meet certain conditions. Typically, the IRS only allows a lien discharge when a property is sold, improving the IRS’s odds of recovering the debt you owe.
When is a Discharge Applicable?
Publication 738, which gives instructions on how to fill out Form 14135, provides information on the five reasons you may request a lien discharge:
- The value of the property remaining under the lien is equal to at least twice the federal tax liability and any other debts secured by the property
- You make a payment equal to the IRS’ interest in the asset
- The property does not have any value—for example, a home that is worth less than the mortgage still tied to it
- You need to sell the property and are willing to put the money owed to the IRS in an escrow account
- You make a deposit equal to the tax lien’s value
In some of these cases, you need to make a payment to the IRS. If the IRS approves your lien discharge, they will contact you and let you know how much you owe.
Steps to Complete Form 14135
Form 14135 is fairly detailed and requires a substantial amount of supporting documentation. Follow these steps and double-check all of your information before submission:
- Taxpayer: This section requests your name, address, telephone number, and Social Security number.
- Applicant: Be prepared to provide information on the person requesting the lien discharge if they are not the same person as the taxpayer. If the person requesting the discharge is not the taxpayer, a copy of the lien must also be attached to the form.
- Transferee: If the property in question is being transferred to a new owner, enter their information in Section 3.
- Attorney: Include your attorney’s name and contact information, as well as either Form 8821 or Form 2848.
- Lender or Finance Company: If you are requesting a discharge because the proceeds from the sale will be held in escrow, include information on the settlement or escrow company.
- Sale Details. The IRS wants information on the proposed sales price and how much of that money will be going to the IRS in exchange for the lien discharge.
- Reason for Lien Discharge. There are five options, detailed above and outlined under Publication 783.
- Property Related to the Lien Discharge. If it is a piece of real estate, you must also include the address and a legible copy of the deed. If the property in question is not real estate, provide the address where the property is being held.
- Supporting Documents. Sections 9, 10, 11, 12, and 13 relate to additional documentation you need. This documentation includes proof of professional appraisal, an additional valuation, copy of the federal tax lien, copy of the sales contract or purchase agreement, copy of a title report, and copy of HUD-1.
- Additional Details. If additional information may apply to your request, such as unusual situations or any pending litigation, attach additional paperwork explaining this information.
- Escrow Agreement. If funds are to be deposited into escrow, include a copy of the escrow agreement.
- Third-Party Lien Release. If a third party is requesting the lien release, sign the waiver in Section 16.
- Signature. Sign and date the form in Section 17.
To complete Form 14135, you’ll need much of the same information you need for any IRS form, as well as a long list of other required forms and documentation. You must have all of your own contact information, as well as the contact information for the person requesting the lien release if it’s a separate person.
Additionally, be prepared to provide in-depth documentation of the property you are requesting a discharge for. This includes the property’s location, current value, and proposed sales price.
The IRS also requests documentation proving the value of the property, the sales price and agreement, and the state of the title. You’ll also need to supply the proposed closing statement and a copy of the federal tax lien.
Avoid These Common Mistakes
Some common mistakes can delay the processing of your form and delay your lien discharge, causing issues if a sale or property transfer is dependent on your lien discharge. Avoid these mistakes as you work on Form 14135:
- Choosing the wrong basis for discharge: There is some overlap across different reasons to request a discharge, which makes it easy for people to mix them up when filling out this form. However, checking the wrong box in Section 7 can lead to denial of your request and force you to start over. Discuss the best reason to request a lien discharge with a tax attorney.
- Failing to attach necessary documentation: Failure to include requested documentation may lead to denial of your application or unnecessary delays. Double-check all of the sections in Form 14135 to verify that you have attached all of the information requested by the IRS.
- Not securing a second appraisal or valuation: This is similar to the last mistake; people may fail to attach a second valuation for their property, assuming that the first one is required and the second one is optional. However, in addition to the appraisal completed by a disinterested third party, you must also provide a county valuation, proposed selling price for property being sold at auction, or informal valuation of property by a disinterested third party.
Submitting Form 14135
After you complete Form 14135, attach the supporting documentation requested by the IRS. You can then send the form and attachments to:
IRS Advisory Consolidated Receipts
7940 Kentucky Drive, Stop 2850F
Florence, KY 41042
Important Deadlines
It’s important to submit your form and supporting paperwork no later than 45 days before the anticipated transaction date for which you need the lien discharge. The IRS needs time to receive your forms, review them, and make a final decision.
What Happens After Submission?
After you submit your documentation and Form 14135, the IRS will process it, verify that the necessary documentation is included, and review your application. Within 45 days, they should determine whether or not they can offer a certificate of discharge. If they need more information, they may reach out to you to request clarification or additional documentation.
Obtaining a Certificate of Discharge
If the IRS decides to provide a certificate of discharge, the timeline depends on the basis for the discharge. If your remaining property tied to the lien is valuable enough to release one piece of property, the IRS will first verify that information and then provide you with the certificate. If you are able to make a payment equal to their interest in the property, the certificate will be sent after you provide the IRS with the necessary payment.
Those requesting a discharge because the property has no value will receive their certificate of discharge once the IRS verifies that the property is valueless to them. If the sale of the property will allow you to place the owed amount in escrow, the certificate will be sent to you when the government’s interest has been placed in escrow.
Differences Between Discharge and Release of Lien
When a lien is discharged, the IRS removes a specific piece of property from the encumbrance of the lien. However, the lien remains on your other assets and property until the taxes are paid off. Here are a few other words you may hear when dealing with tax liens:
- Lien release – occurs only when you no longer owe the taxes and the IRS no longer has a legal right to your assets.
- Lien subordination – applies if the IRS agrees to put its lien at a lower priority than another creditor.
- Lien withdrawal – when the IRS withdrawals the lien from the public record but you still owe a tax debt to the agency.
Additional Considerations
Remember that the lien itself is still active, even when it is discharged from one specific piece of property. However, the lien discharge will allow you to sell, transfer, or borrow against the property in question based on your certificate of discharge terms. The IRS will continue to seek payment until your taxes are paid in full or until the collection period runs out.
What If the Discharge is Denied?
Should the IRS decide to deny your request for a lien discharge, they will notify you via mail. They will also send you Form 9423, Collection Appeal Request. You’ll also receive Publication 1660, Collection Appeal Rights. This allows you to explore your appeal options and determine whether or not you want to appeal their decision. The IRS also provides a written explanation of their choice to deny your application.
When It’s Time to Talk to a Tax Professional
The 14135 form is fairly complex and requires extensive additional documentation, and any mistake could lead to long delays or a denial of your application. When the sale of a valuable piece of property hinges on your ability to secure a certificate of discharge from a federal tax lien, meeting with a tax professional and discussing your options is worth your time.
While a tax lien can significantly complicate your finances and make it difficult to pay off your tax debt, a lien discharge may grant you relief and get you closer to being free of tax debt by choosing the appropriate basis for discharge and submitting all required documentation, you may be able to secure a lien discharge for your property. We can help you navigate this complicated process. Schedule a consultation with our team or call us at (404) 609-1300 now to get started on your tax resolution journey.