Legacy Law Blog

A federal tax lien is the government’s legal claim against a taxpayer’s property when taxes aren’t paid after the initial assessment and any subsequent notices.

It attaches to all real and personal property and the rights to property owned directly by the taxpayer until the tax liability is satisfied or becomes unenforceable.

A lien discharge doesn’t wipe out the tax debt or the lien entirely. Instead, it removes the lien from a specific asset to allow the taxpayer to sell the asset while the IRS preserves its claim on other property.

Lien Discharge vs. Lien Release – The Basics

• A Notice of Federal Tax Lien (NFTL) is the public filing that perfects the government’s lien interest in the taxpayer’s property and alerts other creditors.​ The NFTL is designed to protect the IRS’ interest in the taxpayer’s equity in their assets while there is an outstanding tax balance.
• A release of lien occurs when the underlying tax liability is fully paid or becomes legally unenforceable. When the lien is released for either of these two reasons, the IRS must issue a certificate of release within 30 days. ​
• A discharge of property under IRC §6325(b) removes the lien from a particular item of property (for example, one piece of real estate) so it can be sold or refinanced, while the lien continues to encumber the taxpayer’s remaining property.

Why the IRS Will Issue a Discharge

The IRS can only discharge property if the request fits one of the specific conditions in IRC §6325(b). The IRS has no authority to “just be nice” and let a lien go outside those statutory bases. The Internal Revenue Manual explicitly states that any discharge agreement that does not satisfy one of the §6325(b) conditions exceeds the service’s authority and is not permissible.

According to IRC §6325(b), the IRS can only discharge a lien for the following reasons:

• Equity cushion (“double value”) – §6325(b)(1): The property left subject to the lien after the discharge has a fair market value at least double the sum of the lien plus all senior encumbrances.
• Part-payment – §6325(b)(2)(A): The IRS receives an amount at least equal to its interest in the property in partial satisfaction of the tax debt (often from closing proceeds).
• No value – §6325(b)(2)(B): The IRS determines that its interest in the specific property is valueless (e.g., superior liens eat all available equity).
• Substitution of proceeds – §6325(b)(3): Property is sold and the proceeds are held in escrow or similar fund subject to the tax lien with the same priority and effect as the lien on the property.
• Third‑party owner with bond/deposit – §6325(b)(4): A non-liable owner of encumbered property can obtain a discharge by depositing cash or posting a bond equal to the IRS’ determined interest.

In practice, the IRS is charged with ensuring that the government is at least as well protected after the discharge as before, which is why it focuses heavily on the taxpayer’s equity value in the property, any senior liens and how the IRS will be paid at closing or at a future date.

When a Discharge Makes Sense

An IRS lien discharge is granted by the bureau in very specific circumstances. The IRS is focused on collecting as much of the tax debt as possible. It will only grant a discharge where doing so allows it to collect the equity in the asset or when doing so puts the taxpayer in a position to make bigger monthly payments in the future.

Common scenarios where a discharge is requested include:

• Sale of real property subject to an NFTL where the buyer or title company requires clear title
• Refinancing or new financing on a specific property, where the lender requires removal of the NFTL from that collateral. This can also be accomplished using a lien subordination.
• Third‑party property encumbered by someone else’s tax lien (e.g., transferee property or jointly owned real estate).
• Situations where superior liens consume all available equity and the IRS is effectively unsecured on that asset but still wants to preserve its lien on other property.

In each of these scenarios, the IRS is not forgiving the tax balance. It is releasing its lien on the specific asset in exchange for a payment in the future or acknowledging that its interest in that specific asset has no realizable value because the taxpayer has no equity.

Applying Form 14135 and Required Documentation

The primary way to request a lien discharge is by submitting Form 14135, Application for Certificate of Discharge of Property From Federal Tax Lien. The IRS will require that the application is supported with very specific documentation. If any of the required documents are missing from the discharge package, the IRS will deny the application.

A typical discharge package includes the following as described on Form 14135:

Completed Form 14135

• Taxpayer and applicant information, including authorized representative and contact details
• Identification of the specific property to be discharged (address, legal description, parcel ID or VIN)
• Identification of which §6325(b) provision applies and explanation of why
• Description of the proposed transaction (sale, refinance, transfer) and proposed distribution of proceeds

Property and lien documentation

• Current recorded deed or title reflecting ownership
• Most recent title report or ownership and encumbrance report
• Copy of the NFTL(s) affecting the property
• Payoff statements for senior mortgages and other liens

Valuation and transaction documents

• Independent appraisal or other credible valuation (for real property, a recent professional appraisal is strongly preferred)
• Executed sales contract/purchase agreement or loan commitment
• Proposed settlement/closing statement (HUD‑1/CD or draft ALTA) showing how proceeds will be distributed. The statement should clearly describe the purchase price and the net proceeds due to the IRS.

Proposed funds handling (when applicable)

• Escrow or trust agreement showing how sale proceeds will be held subject to the government’s claim if using §6325(b)(3)
• For §6325(b)(4) cases, a description of the contemplated bond or deposit (amount and surety), although the actual bond/deposit is coordinated after IRS review.

The IRS recommends submitting the application at least 45 days before the anticipated closing or settlement to allow its advisory personnel enough time to review, request additional information and issue a determination without delaying the transaction.

How the IRS Processes the Application

Once Form 14135 and required supporting documentation is received, the case is assigned to a discharge agent who will review the application, request any additional documentation needed to approve the discharge and issue a discharge certificate.

As part of the review of the application, the discharge agent will do the following:

• Verify the existence and balance of the tax liabilities listed on the NFTL
• Confirm taxpayer ownership of the asset and all recorded liens using the title work and any recorded IRS liens
• Review the equity in the asset using the fair market value less any senior liens. The discharge agent will use the appraisal provided in the application and other internal IRS tools to verify that the taxpayer is receiving fair value for the asset and to determine how much of the equity the IRS can expect to receive after closing.
• Evaluate whether the proposed payments or escrow arrangements adequately protect the government’s interest and are in the government’s best interest
• For §6325(b)(4) requests, determine the amount of the required deposit/bond and confirm that the surety is acceptable

The IRS will not approve a discharge unless one of the statutory conditions is met, and the result is consistent with the government’s interest in the asset.

Correspondence With the Discharge Agent

The process by which the discharge agent will communicate with the taxpayer during the evaluative process follows a predictable pattern.

First, the discharge agent will make preliminary contact by phone or letter to confirm receipt of the application, identify any missing items and set expectations for timing. During this initial contact, the discharge agent will discuss the application and any taxpayer requests (timing, etc.) that will need to be considered. The discharge agent may request updated payoff statements, an updated settlement statement or a revised appraisal if values or terms have changed or if the documents provided are not usable due to age.

When the discharge agent determines that the application and supporting documents are sufficient, they will issue a written conditional commitment letter that outlines:

• The basis for lien discharge (§6325(b) provision)
• The minimum amount that must be paid to the IRS from closing or the required escrow/bond
• Instructions on where and how to remit payment or hold funds
• Any conditions that must be met at or before closing (e.g., proof that the taxpayer will be divested of title)

The taxpayer should present this conditional commitment letter to their title company for use during closing. Many title companies are not as familiar with how the conditional commitment letter works with regards to the liens on title.

The conditional commitment letter says that the IRS commits to removing the liens after funds from closing are wired in accordance with the settlement statement to the IRS. This means that, practically speaking, the IRS liens will remain on the property until after closing. This is very different than how a title company addresses other liens on title. Given this difference, it is highly advisable that the taxpayer provide the conditional commitment letter to their closing company as soon as possible to avoid any delays in closing.

During closing, the net equity due to the taxpayer is held in escrow to be wired to the IRS at the agreed upon amount given in the application for discharge. Once the IRS receives the equity, it will issue a certificate of discharge. The certificate is typically mailed and faxed/emailed to the closing agent or recording office as well as to the taxpayer and their representative. This certificate should be filed within 30 days of closing at the municipality where the liens are recorded to release all IRS liens on the asset.

If the IRS denies the discharge request, they will issue a denial letter explaining the reasons, and in many cases the taxpayer or representative may provide additional information or pursue administrative appeal rights. The taxpayer can also refile the discharge application at any time for fresh consideration.

Practical Tips for a Smoother Discharge

If you know that there are tax liens on your property and you want to sell it, there are a few things you can do to make the lien discharge as smooth as possible. They are the following:

• Start early. Build in at least 45 days lead time for the discharge agent to review and approve the application package. Build in additional time for more for complex or multi‑party deals that include additional terms or documentation that the discharge agent will need to review.
• Over‑document value and any encumbrances. Robust, current third-party appraisals and complete lien or mortgage payoff information will make it easier for the discharge agent to confirm the statutory criteria required to approve the discharge.
• Match your discharge theory to §6325(b). Select the correct discharge option on Form 14135 that applies to the property and why the facts support a discharge based on that option.
• Keep the settlement statement synchronized with the IRS’ conditions. Last‑minute changes that reduce the IRS share, add in additional closing fees or other payments, or alter other lien payoff amounts may require the IRS re-approve the discharge and may delay issuance of the conditional commitment letter.

Taxpayers who want to sell an asset with a lien from the IRS can do so in certain circumstances. The lien discharge process is a great way to free up capital to pay your tax balance by selling an asset. By following this guide, taxpayers can be better situated to address any requests for documentation and ensure that their closing is as smooth as possible.