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Procedural Considerations on Collection (Liens) – Part Three: Release or Discharge of a Federal Tax Lien

In the first article in our series on Federal tax liens, we discussed the IRS’s authority, and limits thereto, with regard to imposing and enforcing liens against taxpayers.  In the second article in this series on liens, we discussed the procedure and effect of filing a Federal tax lien. In this third article, we briefly discuss the release, discharge, or subordination of a Federal tax lien.

Certificate of Release and Certificate of Discharge

The IRS must issue a certificate of release of any federal tax lien not later than 30 days after the day on which the liability has been fully satisfied or has become legally unenforceable, or a bond is furnished to and accepted by the IRS.[1] On the other hand, the IRS may issue a certificate of discharge of any property subject to a federal tax lien under four distinct scenarios.

First, a lien may be discharged if the IRS determines that the fair market value of that property remaining subject to the lien is at least double the amount of the unsatisfied liability secured by the lien (plus the amount of all other liens on such property that may have priority over the federal tax lien).[2]

Second, if the taxpayer pays to the IRS an amount equal to the value of the part of the property to be discharged from the lien in partial satisfaction of the lien, or the IRS determines that its interest in the part of the property has no value, the IRS will issue a certificate of discharge.[3]

Third, if the taxpayer sells the property pursuant to an agreement with the IRS and the proceeds of the sale are held in escrow,[4] the IRS will issue a certificate of discharge.[5]

Fourth, the IRS will issue a certificate of discharge if the third-party owner of the property deposits with the IRS an amount or furnishes a bond equal to the value of the IRS’s interest in the property.[6] The IRS will refund the deposit with interest and release the bond if it determines that the unsatisfied liability giving rise to the lien can be satisfied from a source other than the property (i.e., through a lien on the original taxpayer’s property).[7] Critically, if no action to contest the lien is filed[8]—within the prescribed period of 120 days after the certificate of discharge is issued—the IRS will, within 60 days after the expiration of such period, apply the deposit or bond to satisfy the liability.[9]

Certificate of Subordination

The IRS may also issue a certificate of subordination of any lien upon a part of the property subject to the lien under two primary circumstances.[10] First, the taxpayer pays the IRS an amount equal to the amount of the to-be-senior lien or interest.[11] Second, the IRS determines that the amount realized by the IRS will be increased by reason of the subordination certificate.[12]

Certificate of Nonattachment

The IRS may issue a certificate of nonattachment if the IRS determines that any person (other than the person against whom the tax was assessed) is or may be injured by the appearance that a notice of lien[13] refers to such person.[14]

If a certificate is issued[15] and is filed in the same office as the notice of lien to which it relates, that certificate will be conclusive to the IRS and third parties.[16] However, the IRS may revoke a certificate of release or nonattachment under narrow circumstances including a breach of the collateral agreement in connection with the compromise under IRC § 7122.[17] Finally, if the person liable for the tax re-acquires the property after a certificate of discharge has been issued, that certificate will be void.[18]

Administrative Appeal of Liens

Any person (a taxpayer or third-party) may appeal to the IRS after the filing of a notice of federal tax lien on the property or rights to property of such person for the release of the lien alleging an error in the filing of the notice of such lien.[19] If the IRS determines that the filing of the notice of lien was erroneous, the IRS will expeditiously issue a certificate of release, and will include in the certificate a statement that the filing was erroneous.[20]


Footnotes:

[1] IRC § 6325(a).

[2] IRC § 6325(b)(1).

[3] IRC § 6325(b)(2).

[4] Subject to the liens and claims of the IRS.

[5] IRC § 6325(b)(3).

[6] IRC § 6325(b)(4).

[7] Id.

[8] Pursuant to IRC § 7426(a)(4).

[9] IRC § 6325(b)(4).

[10] IRC § 6325(d).

[11] IRC § 6325(d)(1).

[12] IRC § 6325(d)(2).

[13] Filed under IRC § 6323.

[14] IRC § 6325(e).

[15] Pursuant to IRC § 6325.

[16] IRC § 6325(f)(1).

[17] IRC § 6325(f)(2).

[18] IRC § 6325(f)(3).

[19] IRC § 6326(a).

[20] IRC § 6326(b).

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