As stated in earlier blogs, the Internal Revenue Service (IRS) has several tools they use to collect back taxes owed: liens, levies, wage garnishments, etc. As the saying goes: there is no escape from death and taxes. The IRS has several means of protecting their interest in the event you fail to pay your tax debt in a timely manner.
The IRS has the power to place a Federal Tax Lien against all of your assets and properties: financial, personal, business and/or real estate. Federal tax liens vary depending upon each individual situation and case. By failing to pay the IRS timely, a lien will be attached to all of your current and future assets until the offending tax issue is resolved. Furthermore, the lien can develop into a levy which empowers the IRS to seize any of your assets to pay your tax debt if you do not address a tax debt in a timely manner. Assets include vehicles, personal properties, jewelry, coin collections, real estate properties, stocks, bonds, cash, bank accounts, even bitcoin. Resolving your tax debt prevents a lien from being assessed or resolves one that has already been attached to any of your properties.
It is called tax lien discharge. A discharge removes the tax lien from the specific property to which it was attached, but not to every tax lien. A discharge is specific to which property is affected. Once a tax debt is satisfied, the IRS grants a tax lien discharge if it accepts your request for discharge. The IRS will issue you a Certificate of Discharge which will allow you to sell, refinance or “retrieve” the property that had the tax lien attached to it.
Anyone wishing to sell or refinance a real estate property with a tax lien attached to it should apply for a Tax Lien Discharge. Otherwise, you will have difficulty in selling or refinancing the property since the tax lien remains with the property until it is discharged. Although the new owners would not be subject to paying the tax debt, the IRS would still be able to place a lien against the property and seize it. Most potential buyers would not want this liability and so the tax lien would likely discourage any buyers.
Applying for a tax lien discharge requires completing forms regarding the appraised value of the property, its description and the basis for a discharge. The IRS must be satisfied that granting the tax lien discharge would not jeopardize their interest in the property. In other words, the IRS would still be paid the amount owed without the use of a tax lien. The IRS would consider the following in granting a tax lien discharge:
- Proof that the value of the property is worthless to the IRS. For example, you owe more on the property than an appraisal states that it is worth.
- You have other valuable assets attached to the tax lien.
- You can sell the property and provide the proceeds to the IRS.
- You can pay the IRS an amount equal to the interest they have on the property.
Once the IRS approves your application for a tax lien discharge, they will send you a Certificate of Discharge for that property. You can then:
- List the property for sale without the liability of a tax lien attached to the property.
- Refinance the property and use the money to pay toward your tax debt.
- Sell the property outright and use the proceeds to pay the tax debt in full.
However:
- You would still owe any remaining tax debt along with penalties and interest.
- The discharge only applies to the specific property named on the Certificate of Discharge.
- Any other property attached to the tax lien would remain attached and subject to levy if the tax debt is not paid in full.
Since this process is complicated and any mistakes may make the situation worse, it is advised to consult a tax professional. Call us today so that we can determine your best options. More tax resolutions will be discussed in the coming blogs, so please visit us again.