Selling or Refinancing when there is an IRS Lien
As a property owner you have many obligations. If one of these involves having a Notice of Federal Tax Lien filed against your property, the IRS has some important tax information for you.
You may have to submit one of two application forms with the IRS, depending on your lien situation. To help you understand the process, we’ll go line by line through the forms, giving you tips and telling you how to avoid errors along the way.
First, the critical question:
Are you selling, refinancing, or using your property as collateral for a loan that won’t fully pay your tax debt?
If you answered “Yes” to this question, you need to apply to the IRS for what we call a discharge or subordination.
What is a discharge or subordination and how can it help me sell or refinance my property? Discharge means the IRS removes the lien from property so that it may transfer to the new owner free of the lien. Use Form 14135. Subordination means the IRS gives another creditor the right to be paid before the tax lien is paid. Use Form 14134.
We will not be talking about the estate tax liens here. If you need help with these, please refer to Form 4422 if selling, or Publication 1153 if refinancing. Nor will we discuss Purchase Money Mortgages. For information on this topic, please go to Publication 785.
Now let’s get started. Your application for discharge or subordination will be handled on a first come, first served basis.
Here’s our first important tip…
You need to get your discharge or subordination application to the IRS at least 45 days before the sale or loan settlement meeting. If the Notice of Federal Tax Lien is discovered late, your sale or loan could be delayed.
You need to include the documentation for your settlement meeting with your application.
This brings us to our second tip…
Not only is it important to answer the questions on the application form, but also to attach readable copies of the documents requested. Incomplete applications will delay the IRS decision. We’ll discuss where to mail your paperwork later.
By the way, if you are trying to avoid foreclosure, be sure to indicate this on your application and the IRS will do its best to expedite your request. The IRS will review your application based on the specific facts of your situation and the law, and contact you if there are questions.
Ok. Let’s look at the application forms you’ll need, if you’re applying to the IRS for a discharge or subordination. It may be helpful at this point to download from IRS.gov or have a copy of the forms 14135 or 14134 to follow along.
To help you with the application process, you will need Publication 783 or 784, which contain instructions on filling out the forms, have the application forms themselves, along with FAQ’s.
Sections 1, 2, and 3 of either the discharge form 14135 or the subordination form 14134 are self-explanatory. If you are using a representative, fill in section 4, and be sure to indicate who is being represented.
Here’s another tip:
While having a representative is not required, if you hired someone to represent and speak on your behalf, attach Form 2848. Both of you must sign this form.
If you want the IRS to share your information with someone else, you would attach Form 8821. If you are attaching one or both of these forms, check the “yes” box in section 4.
In Section 5, you would fill in the contact information for your finance company.
The information in Section 6 will vary depending on the type of transaction.
If you are selling, use form 14135 and enter the sales price. If you are refinancing or getting a loan, use form 14134 and enter both your existing and new loan amounts.
Section 7 asks for either your basis for discharge or subordination. The IRS will contact you if there are questions or your basis needs to be changed.
Let’s start with discharge. Check one of the following boxes on form 14135 that best describes your situation:
If you own more property than is being sold and the property not being sold is worth twice your debt to the IRS, you would need to do three things.
First, check the top box in section 7 - 6325(b)(1)
Second, go to the bottom of Section 8, check the “attached box” and send copies of the deeds to the property you are not selling.
Third, go to section 9, and send appraisals for that same property.
Back to Form 14135, Section 7: If there is money left over after closing costs then you would check the second box 6325(b)(2)(A). On the other hand, if there is no money left over after closing costs, then check the third box 6325(b)(2)(B) as your basis for discharge. However, if there is money left over after closing costs, but your sale proceeds will be escrowed, such as for an auction or foreclosure sale, you would check the fourth box 6325(b)(3)
The last box 6325(b)(4) should be checked if you bought property with a federal tax lien still attached.
Time for our next tip:
If you need more details on how to determine your basis for discharge, publication 783 has examples. Download the publication from IRS.gov or order it by calling 1-800-829-3676.
Now let’s turn to subordination and its form 14134. In Section 7 you would check the box on form 14134 that best applies to you. If your re-finance or loan is to obtain money to apply to your tax debt, you would check the first box 6325(d)(1).
On the other hand, if your re-finance or loan will not provide money for your tax debt, but you can document that it will benefit both you and the IRS, then check the last box 6325(d)(2) in section 7. If you do check this box, be sure to also check the box in Section 14, and include on a separate signed and dated piece of paper, how the loan will help pay your IRS debt.
Here’s a tip:
If you need more examples of subordination, get Publication 784. You can download it from IRS.gov or order the publication at 1-800-829-3676.
Section 8 for either application form asks for a description of your property, which could be either real estate or personal property such as art work, a boat, a plane, or your business receivables. Don’t forget to provide the property address.
Now time for another tip ….
If the property is real estate, check the “attached” box and include a legible copy of the deed.
For Section 9 of form 14135, when you are selling property, the IRS requires a professional appraisal, which is generally part of the closing package and a second type of value estimate.
Form 14134 Section 9 does not call for a professional appraisal for your refinance or loan. Check the box for the type of value estimate you are including.
Sections 10 through 14 are a checklist of the attachments which you must include with either the discharge or subordination application form.
Section 10 asks for copies of the federal tax liens attached to the property. You can either provide us copies of the Notices of Federal Tax Lien and mark the “attached” box or write down the lien number and check the “no” box.
The information in Section 11 will vary depending on the type of transaction.
When you are selling property and using form 14135, you need to provide a copy of your sales contract. If you don’t have a copy of your sales contract, explain how the property ownership will transfer and to whom.
When your property is collateral for a loan and you are using Form 14134, you need to send the IRS a copy of your loan agreement. If you don’t have a loan agreement, tell us how your new loan will benefit the IRS.
Sections 12 and 13 are the same for either form 14135 or form 14134.
In Section 12, the IRS requires a copy of the current title report. If you don’t have a title report, check the “no” box and list all creditors with liens or claims against the property being sold or used as collateral.
In Section 13, the IRS needs a copy of your proposed closing statement, to determine how the money will be distributed. Typically the statement is on a HUD-1 form.
Here’s a new tip:
If you are providing additional documents that are important to your situation, you would check the box in Section 14 and include the documents with your application form. Here are a few common examples.
If this is a short sale, attach your short sale documents. Or, if you want the IRS to consider allowing relocation expenses, attach form 12451.
These next two sections only pertain to Discharge Form 14135:
If your property will be sold in an escrow sale, with creditors paid from the escrow, the IRS needs your draft escrow agreement with your form 14135. Be sure to check the “attached” box in Section 15.
Once we receive your draft agreement, we will work with you on finalizing the agreement.
Section 16 of form 14135 is if you bought property with a lien attached where you are not the taxpayer and you checked 6325(b)(2)(A) or (B) as your basis for discharge in section 7.
Check the Waive box in this section. Please read Publication 783, Section 7 for further explanation.
The final section on both forms is the Declaration. Here is where you must sign and date your application under penalties of perjury.
At this point, your form should be complete. Attach all your supporting paperwork and send your application package to one of the IRS Advisory Offices.
Here’s a Quick tip:
The correct mailing address of the IRS Advisory Office will be found in publication 4235. It will be the one for the state that the Notice of Federal Tax Lien was filed in.
Once the correct Advisory Office receives your application, it will be reviewed first come, first served. An employee of the IRS Advisory group will contact you if they have a question, or your application is incomplete.
The IRS Advisory approves or denies your request based on your application and comparison with federal and state property rules.
If the IRS approves your application, they will send you your discharge or subordination certificate, based on what box you checked, or best applies to you in Section 7.
Advisory may send you a commitment letter if there are conditions which must be met in order to grant your request. Your certificate is not issued until the conditions of the commitment are fulfilled.
See Frequently Asked Question 4 in either Publication 783 or Publication 784 for the full details on when you can expect to receive your certificate.
If, however, the IRS denies your request, or you disagree with the IRS valuation in a commitment letter, you can request an appeal through the Advisory office using Form 9423, Collection Appeal Request.
Publication 1660, Collection Appeal Rights, explains your appeal rights.
We know that having a notice of federal tax lien on your property raises many complex financial issues. Our in-depth coverage of subordination and discharge application forms was designed to give you the knowledge needed to be able to navigate successfully through the application process. Be sure to check the IRS publications or talk to the IRS Advisory Group or your tax advisor for more details. Thank you.