If you owe taxes to the IRS, a tax lien automatically arises against you and attaches to just about everything you own. This is sometimes called a secret lien since the government’s claim does not initially appear in any public records. Rather, the lien automatically comes into existence when the tax liability is assessed. Eventually, if you do not pay the amount owed, you will get a letter in the mail demanding you pay the amount owed and stating that the IRS may file a notice of your tax debt in the public records offices where you live. This notice is officially called the Notice of Federal Tax Lien.
Asset Subject to a Notice of Federal Tax Lien
The Notice of Federal Tax Lien is typically filed in your Secretary of State’s office and may also be filed at the appropriate county clerk’s office if real estate is involved. The Notice of Federal Tax Lien puts the public on notice that you owe the IRS money, and that the IRS has rights to your property, just like a recorded mortgage.
A Notice of Federal Tax Lien filed against you can significantly harm your credit, and make it difficult for you to finance any purchases on credit or refinance your house. If you have a chance to be proactive, a good tax attorney or other qualified tax professional may be able to help you avoid a Notice of Federal Tax Lien in the first place. But, if you have not been so proactive, and you are now faced with a Notice of Federal Tax Lien, don’t despair. You still may have options.
You may want to first consider why you want to sell the property in the first place. Perhaps you are selling your motorcycle to help pay off your IRS debt, or maybe you are selling your house boat to get out from underneath large monthly payments to the bank, or maybe you are lucky enough to be selling your asset to make some money for yourself. It is first best to uncover your motive for wanting to sell your property. It also may be a good time to consult with a tax attorney to make sure that your motive will be accomplished by selling your property, and to investigate if possibly there is a better strategy to achieve your end goal.
Once you have confirmed that selling your property is the best option for you to achieve your goal, then the question becomes — how do you get the tax lien removed from the property in question so the buyer can rest assured that the property will be free of any tax liens when the property is transferred to them? It is important to note that if property transfers to the buyer with the tax lien attached to it, the IRS may have the right to seize the property from the buyer. Therefore, most buyers are going to want assurance that the tax lien will be removed from the property. Alternatively, you run the risk that the buyer will sue you in the event that the IRS seizes the property from the buyer after you complete the sale.
Of course, the first and most obvious solution is to pay the tax in full. Once you have paid your debt in full, the IRS must record a Satisfaction of Lien within 30 days of full payment. This will remove the lien from the property.
If you don’t have enough money to pay your back taxes in full, you can still sell the asset free and clear of the tax lien so long as the IRS approves an Application for Certificate of Discharge of Federal Tax Lien. Brave do-it-yourselfers might endeavor to navigate this process without assistance. Many others seek assistance from a tax attorney or other qualified tax professional.
The IRS is likely to discharge the asset from the lien (allow the buyer to take ownership free and clear of the tax lien) if the asset is sold for fair market value (or close to fair market value) and the proceeds of the sale of the asset are used to pay down the IRS taxes owed.
For example, let’s say you own a 2011 Toyota 4Runner that you want to sell to your neighbor for $15,000, but there is a Notice of Federal Tax Lien filed against you in the amount of $25,000 since you owe the IRS $25,000 in taxes. Let’s say that there are no other secured interests, such as a bank loan, against the 4Runner.
You or your tax professional would first submit the Application for Certificate of Discharge to the IRS. In the Application, you would indicate your desire to sell this vehicle for $15,000 which, you agree, would be paid to the IRS in exchange for discharging the vehicle from the tax lien. Assuming the IRS approves the Application, it will issue a written commitment promising to discharge the vehicle from the tax lien upon payment of $15,000. Then, upon payment of $15,000, the asset will be discharged from the lien and the $15,000 payment will be applied to the $25,000 that you owed. In other words, you would now owe the IRS only $10,000.
I recommend submitting something such as a blue book value analysis with the Application to substantiate that the sale price is a fair price. If there is no blue book for the type of asset you wish to sell, do your best to prove that the sale price is a fair price. Note that the IRS could potentially require an appraisal—conceivably even two appraisals–if it has reason to doubt that the sale price is fair. If the property to be sold is real estate, an appraisal is often required.
Although it may seem cumbersome and intimidating to get a lien removed from an asset to sell the asset free and clear, the process is actually quite streamlined and can be efficient if you get help in getting it done the correctly. The lien should not be an insurmountable obstacle if you want to transfer real property, personal property or even a business.