An IRS Lien Is Holding Up Your Closing

The title search came back, and there it is: a Notice of Federal Tax Lien. The title company will not close until the lien is dealt with. The buyer's lender is asking questions. The closing date is on the calendar, and you are wondering whether the whole deal is about to fall apart.

It does not have to. The IRS has procedures built for exactly this situation, and they are used all the time. The trick is knowing which one fits your numbers and getting the paperwork in early. Here is how I would approach it.

Why the lien matters at closing

A federal tax lien attaches to all of your property, including the house. A filed lien notice tells the world, including title insurers, that the government has a claim. A buyer wants clear title and a lender wants first position, so the title company needs the IRS lien either paid off, released, or discharged from this particular property before it will insure the deal.

Step one: figure out which situation you are in

Get a rough closing statement from the title company or your agent. Compare the sale price to everything owed on the house, then to the IRS balance.

Your situation	Usual path
Your net proceeds will pay the IRS in full	Lien payoff at closing, then release
Proceeds will pay the IRS only partly	Certificate of discharge under IRC 6325(b)(2)(A)
Senior mortgages eat all the equity (often a short sale)	"No value" discharge under IRC 6325(b)(2)(B)
You dispute how much goes to the IRS	Discharge with proceeds held in escrow under IRC 6325(b)(3)
Refinancing, not selling	Certificate of subordination under IRC 6325(d)

If the sale pays the IRS in full: payoff and release

Ask the IRS for a lien payoff letter showing the amount needed to satisfy the liability as of the closing date. The title company pays that amount out of your proceeds. Under IRC 6325(a), once the liability is fully satisfied, the IRS must issue a certificate of release of the lien no later than 30 days afterward. Make sure the payoff figure is current for the actual closing date, since interest keeps running.

If the sale will not pay the IRS in full: certificate of discharge

A certificate of discharge removes the lien from one specific property while leaving it in place on everything else you own. IRC 6325(b) sets out when the IRS may issue one. The ones that come up most in home sales:

• Payment of the government's interest, IRC 6325(b)(2)(A). The IRS receives an amount it determines is at least the value of its interest in the property. In a typical sale, that is your net equity after senior mortgages and allowed closing costs.
• No value, IRC 6325(b)(2)(B). The IRS determines its interest has no value, for example because senior liens exceed the sale price. IRM 5.12.10 says short sale applications are generally considered under this provision.
• Proceeds held as a fund, IRC 6325(b)(3). The sale proceeds are held in escrow, subject to the government's claims with the same priority they had against the property, while a dispute is worked out.
• Double value, IRC 6325(b)(1). Your remaining property is worth at least twice the IRS liability plus senior liens. This one comes up more when you own other real estate.

Under IRM 5.12.10, for most of these the seller must be fully divested of the property after the transaction. A discharge does not erase the tax. The lien stays on everything else you own, and under IRC 6325(f)(3) it reattaches if you later reacquire the discharged property.

How to apply

The application is Form 14135, Application for Certificate of Discharge of Property from Federal Tax Lien. Publication 783 contains the IRS instructions. The form asks for information about the property, the proposed transaction, the liens on the property and its value, and Publication 783 lists the supporting documents to attach. Under 26 C.F.R. 301.6325-1, the application must be made in writing.

If approved, the IRS usually issues a conditional commitment letter spelling out what must happen at closing, such as how much it must receive. After closing, the IRS checks that the conditions were met and issues the certificate.

Timeline realities

This is where deals get into trouble. Under IRM 5.12.10, the IRS aims to contact an applicant about an incomplete package within 21 days, and to make a recommendation on a complete application generally within 30 days, or 14 days when a foreclosure sale is pending. Requests for more information typically come with 30-day response deadlines. Add the time to gather documents, and you can see why waiting until the week of closing does not work.

Practical steps:

1. Apply as soon as you have a signed contract. Do not wait for the closing to be scheduled.
2. Send a complete package the first time. Missing documents are the most common delay.
3. Build cushion into the closing date, and tell the buyer's side early that an IRS certificate is in process.
4. Respond to IRS requests fast. A missed deadline can mean the application is closed.

Refinancing instead: subordination

If you are refinancing rather than selling, a new lender will want to be ahead of the IRS lien. A certificate of subordination does that. Under IRC 6325(d), the IRS may issue one when it is paid an amount equal to the interest being placed ahead of it, or when it believes subordination will ultimately increase what it collects and make collection easier. The application is Form 14134, Application for Certificate of Subordination of Federal Tax Lien, with instructions in Publication 784. A common example is a refinance that lowers your payment and frees cash to pay the IRS.

Getting the title company what it needs

• A copy of the lien notice and the IRS contact on your account.
• The IRS payoff letter, or the conditional commitment letter, showing what must be paid at closing.
• Instructions for how and where the IRS payment is sent.
• After closing, the recorded certificate of release or discharge for the file.

Under IRC 6325(f), a certificate of discharge filed where the lien notice was filed is conclusive that the property is discharged from the lien. That is what the title insurer needs to see.

What not to do

• Do not hide the lien from the buyer or the title company. It will be found, and hiding it damages trust you need to close.
• Do not wait until closing week to contact the IRS.
• Do not use a stale payoff figure.
• Do not assume the discharge ends the tax debt. The lien remains on your other property and the balance remains owed.
• Do not ignore a levy notice while you are focused on the sale. Read how IRS seizures of homes and property work.

Getting help

For background on what the lien itself means, read the federal tax lien notice and Letter 3172. If the lien is one of several IRS problems landing at once, start with the first 24 hours of an IRS emergency.

Our office prepares discharge and subordination applications and works with title companies and agents to keep closings on track. Learn more at GetIRSHelp.com or call (813) 229-7100. Have the title report, the contract and the estimated closing statement ready.