Legacy Law Blog

As we covered in a previous blog post, a common tactic utilized by the IRS to preserve its interest in property owned by taxpayers who have tax liabilities is placing a lien on  their real estate.

For many taxpayers who are not contemplating the sale or refinancing their home in the future, a lien is merely a nuisance. But what about taxpayers who want to sell their home or refinance their mortgage to get a lower rate or access cash?

If an IRS tax lien is making life difficult, there are ways taxpayers can work with the IRS to fix the situation. Two common solutions are the lien discharge and lien subordination. Understanding the differences and what each option entails can empower those dealing with tax liens to make informed decisions.

Discharge vs. Subordination

Lien discharge and subordination are two IRS processes that help taxpayers manage or move past federal tax liens, especially when dealing with property and finances. While both options offer relief, they serve very different purposes and involve unique steps for application. The following chart provides a quick reference guide about the differences between discharge and subordination.

In summary, a discharge lets a property be sold or transferred without the lien attached, helping the buyer obtain clear title. Subordination, by contrast, does not remove the IRS lien but allows a lender (like a bank) to step ahead of the IRS on a property, making it possible for the taxpayer to obtain a loan or refinance while the lien remains in place.

IRS Lien Discharge

An IRS lien discharge is a process that removes the federal government’s tax lien from a specific piece of property, allowing that property to be sold, refinanced or transferred free of the IRS’ claim. This does not erase the overall tax debt or remove the lien from other assets the taxpayer owns—only from the property described in the discharge.

A discharge is typically used when a taxpayer needs to sell a property encumbered by a tax lien, and either the IRS receives what it is owed from the sale or the property’s value is insignificant relative to the tax debt. After the discharge, the IRS lien remains affixed to other taxpayer assets and any remaining balance is still owed, but the discharged property is released from the lien so a new owner or lender can take clear title.

A discharge is different from a lien release, which occurs only when the entire debt is paid, and the lien is removed from all assets. A discharge helps facilitate property sales, cash-out refinancing and certain transfers without having to pay off the entire tax debt first.

How to Apply for IRS Lien Discharge

To apply for an IRS lien discharge, file Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien) and attach the required supporting documentation to request the discharge.

• Gather documentation: sale contract, appraisal, title report, settlement statement and the current federal tax lien.
• Fill out Form 14135 sections on taxpayer, applicant, transferee, attorney, lender, sales details and indicate reasons for discharge.
• Attach all required documents.
• Submit the form to the IRS office specified in the instructions.
• The IRS reviews, requests more documentation, if needed, and then issues a Certificate of Discharge for the property.

Common reasons for denial include insufficient documentation, incorrect basis for discharge and missing appraisals. In most cases, the IRS will identify and request additional information if needed.

IRS Lien Subordination

An IRS lien subordination is a process where the IRS allows another creditor’s lien (usually a lender or mortgage holder) to take priority over its own tax lien on a piece of property. This does not remove the IRS lien—it simply means the IRS voluntarily moves “behind” another creditor when it comes to being paid from the property’s value in a sale or refinance.

Subordination is typically used to allow a taxpayer to refinance or apply for a new loan on the property even though the IRS maintains its lien. This is important because most lenders require first position before lending money.

The IRS will consider subordination if it will enhance the taxpayer’s ability to repay their tax debt by freeing up cash for a large payment or reducing the mortgage to allow larger monthly payments to the IRS.

Subordination helps taxpayers by allowing financial transactions that are otherwise blocked by the IRS’ claim on property, but the federal tax lien itself remains in place until the tax debt is resolved.

How to Apply for IRS Lien Subordination

To apply for an IRS lien subordination, file Form 14134 and provide supporting information, including how the transaction will benefit the IRS and support repayment.

• Gather documentation: mortgage agreement, loan application and federal tax lien information.
• Complete Form 14134, detailing why subordination helps the IRS or does not harm its interests.
• Submit your packet to the IRS office responsible for your region.
• The IRS reviews the request and determines whether subordination is justified—approval is not guaranteed and can take weeks or months.

Subordination is often granted if paying proceeds to the IRS matches the subordinated interest or increases the total IRS collections. Ongoing compliance with tax obligations is required throughout the process.

Why This Matters

IRS lien discharge and lien subordination are valuable options for taxpayers who want to sell a home, refinance or secure new financing while dealing with a federal tax lien.

Discharge allows a taxpayer to free up a specific property, while subordination lets a creditor sidestep the IRS' lien priority for practical financial reasons. Both require careful documentation and formal application to the IRS on dedicated forms (14135 for discharge, 14134 for subordination).