I previously posted about the process for requesting the subordination of an IRS lien – that post can be found here. However, as noted in that post, subordination is primarily useful in cases where a taxpayer intends to keep property (and thus any liens on that property would stay in place). But what if a taxpayer wants to sell the property and use the proceeds to pay off all or part of an IRS liability? The IRS requires these taxpayers to apply for a “certificate of discharge,” discussed further below.
Publication 783
IRS Publication 783 lays out the process for applying for, and obtaining, a certificate of discharge. [1] Generally, Publication 783 states that taxpayers must complete and submit IRS Form 14135 and provide certain supporting documents. The IRS will review the submission and make a determination, within its discretion, regarding whether to grant the certificate.
Form 14135
Like its counterpart for subordinating liens, Form 14135 is somewhat lengthy, and requires the taxpayer to attach a variety of documents related to the property at issue (including title, appraisal value, and lien information) as well as the proposed sale transaction (including purchaser information, escrow information, and the proposed sale terms). [2]
Additionally, the taxpayer must identify the statutory basis for requesting the certificate of discharge. [3] In this regard, Form 14135 presents the following options:
- 6325(b)(1)
The IRS may issue a certificate of discharge with respect to any part of a property where the IRS would receive full payment of the outstanding federal tax liability. [4]
Taxpayers selecting this option would be required to make a payment to the IRS, but not at the time of submitting the Form 14135. The taxpayer would be assigned an “Advisory Group Manager” to review the application and subject property. The Advisory Group Manager, in turn, would determine the amount and timing of the payment. If the application is granted under this option, the taxpayer will receive the certificate once the IRS receives payment of the agreed upon amount in partial satisfaction of the tax liability. [5]
- 6325(b)(2)(B)
The IRS may issue a certificate of discharge where it determines that its interest in the property is $0. [6] This could occur, for example, where the property is subject to superior liens (i.e., higher priority than the federal tax liens at issue) that exceed the fair market value of the property.
Taxpayers selecting this option would not be required to make a payment in connection with the certificate of discharge. Under this option, the taxpayer may receive the certificate once the IRS makes a determination that their interest in the property is $0, and once the IRS receives proof that the taxpayer has been divested of title to the property. [7]
- 6325(b)(3)
The IRS may issue a certificate of discharge where the taxpayer intends to sell the property and transfer the entire proceeds from the sale to the IRS in full or partial satisfaction of the federal tax debt. [8] This generally requires an agreement that the funds be held in an escrow account for the benefit of the IRS.
Taxpayers selecting this option would be required to make payment as determined by the Advisory Group Manager, and not at the time of submitting Form 14135. If a taxpayer’s application is granted under this option, the taxpayer will receive a certificate once the proceeds are placed in the approved escrow account. [9]
- 6325(b)(4)
Finally, the IRS may issue a certificate of discharge where the taxpayer agrees to submit a deposit (or bond) equal to the value of the IRS interest in the property. [10] In this case, a taxpayer would be paying off the liability, or substituting one property for another.
Taxpayers selecting this option would be required to make payment as determined by the Advisory Group Manager, and not at the time of submitting Form 14135. If a taxpayer’s application is granted under this option, the taxpayer will receive a certificate once it receives the deposit or bond. [11]
If a taxpayer’s application is denied, the taxpayer will receive a Form 9423, along with an explanation regarding the denial. This form will also provide appeal rights. [12]
[1] IRS Pub. 783.
[2] IRS Form 14135.
[3] Id.
[4] I.R.C. § 6325(b)(1).
[5] IRS Pub. 783.
[6] I.R.C. § 6325(b)(2)(B).
[7] IRS Pub. 783.
[8] I.R.C. § 6325(b)(3).
[9] IRS Pub. 783.
[10] I.R.C. § 6325(b)(4).
[11] IRS Pub. 783.
[12] Id.
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