Release of a Federal Tax Lien

There are various ways to eliminate or minimize the effect of a federal tax lien. The release of a tax lien completely extinguishes the lien. A discharge of property removes certain specific property from the lien but does not otherwise affect the validity of the lien filed against other property. Subordination of a tax lien indicates that the tax lien's priority in payment is subordinated to the interest of some other creditor or lienor. A foreclosure sale of the taxpayer's property by a party with a security interest that is senior to the federal tax lien can discharge the tax lien from the property.

The IRS must release a federal tax lien within 30 days after: (1) the date on which the IRS determines that the assessed tax liability and any related interest have been fully paid or have become legally unenforceable due to the expiration of the statutory period of limitations on collection; or (2) the date on which the taxpayer offers and the IRS accepts a bond under which payment of the assessed tax liability, with interest, is guaranteed before the statute of limitations expires.

In either case, the release of the lien must be evidenced by a certificate of release. The taxpayer must request the certificate; i.e., the IRS does not ordinarily take such action on its own initiative. The request must be in writing and set forth the grounds on which the release is requested, and if because of satisfaction of the tax liability, provide evidence of payment. The IRS issues a certificate of release from a tax lien when it finds that the taxpayer has satisfied the tax liability in full. A certificate of release may also be issued by a district director if the taxpayer furnishes a bond which is accepted by the IRS for guaranteed payment of the assessed tax liability, with interest, to be paid not later than six months before the statutory period of limitations on collection (including any extensions) expires.

To be valid, the certificate of release must sufficiently identify the underlying tax obligation and lien as well as any notices of federal tax lien filed with respect to that lien so that a person searching title to the property can discover whether a lien currently exists. Accordingly, a valid release refers to both the original notice of lien and any refiled notice of tax lien. The IRS, however, is not required to file the certificate of release, because the statute only provides that the certificate must be issued. 

(“Issue” means that IRS either delivers it to recording office where corresponding notice of tax lien has been filed or delivers it to taxpayer, who can then see to its filing).

If the IRS fails to release the lien, the taxpayer can file a civil suit for damages. The suit must be filed by the person from whom the IRS is seeking to collect the tax liability. Before filing suit, the taxpayer must exhaust all administrative remedies, including setting forth certain information about the lien and the damages incurred. Moreover, suit cannot be filed before the earlier of the date the IRS makes its decision or 30 days after the filing of the administrative claim. These waiting periods are intended to provide the IRS an opportunity to respond. 

Once an action is properly filed, the taxpayer must show: (1) that the IRS knew or should have known that the assessment had been fully satisfied or was legally unenforceable at the time the release was requested, and (2) that the relevant IRS employee knowingly or negligently failed to release the lien within 30 days.