The basic concept of a tax lien discharge is to convince the government that keeping the tax lien on their books will not improve the collection of the IRS tax debt. The classic example in a tax lien situation that you can obtain a discharge for is being upside down on your mortgage. If the fair market value of the house is less than your mortgage that is a clue that the government cannot collect on your back taxes.
The tax lien discharge process has a wider scope and can be utilized in many situations:
1. The discharge of the tax lien can be obtained if the fair market value of the property is double the combined total amount of IRS tax debt plus other secured liens to other parties such as mortgage companies or banks.
2. If the amount already paid in to the government equals the secured government interest amount in the property. To explain this point: suppose that the property is at $96,000 dollar. Suppose the secured mortgage company loan is $90,000. The government's interest will be valued at $6,000. If the taxpayer had previously entered an installment agreement and has already paid $6,000 to the government of his back taxes a discharge of the tax lien can be requested.
If the taxpayer is married and the liability is not the other spouse’s liability the required amount paid in to the government to file for the discharge of tax lien is $3,000 not $6,000. So if the taxpayer had paid already $3,000 in the installment agreement he can request under this scenario a discharge of the tax lien. He will have to pay only one half of the proceeds in satisfaction of the liability secured by the tax lien.
3. The value of the interest of the government to be equal to zero. This, as we said, is the classic example for discharge of lien requests. In this instance, if a taxpayer owns a house with a fair market value of $200,000 and the tax lien is $190,000. It appears that there is an equity in the house of $10,000. But by the IRS calculation the value of the house is only $160,000 (80% of the fair market value). Accordingly, by the IRS calculation, the house is upside down by $30,000 ($190,000-$160,000.) Then an application of a lien discharge can be successful.
4. Taxpayer can apply for a lien discharge if they offer that the proceeds from the sale of the property are placed in a fund subject to the lien putting the US government in the same position as when it had the lien on the property. The government will approve the escrow agent and will allow escrow expenses that should be made by the taxpayer form the sale proceeds.
5. Taxpayer can apply for a lien discharge in contemplation of foreclosure on their properties where taxpayers may contend that the interest of the government has no value. They will have to wait 30 days for the determination after which the government will issue a conditional commitment upon verification that its interest has no value. Once the foreclosure is completed the government will issue a certificate of discharge.