The IRS will usually employ one of four methods to free property from a federal tax lien:
1. Issuance of a Release of Federal Tax Lien (IRS form 668[z]) which indicates a complete satisfaction of the entire debt secured by the lien. To obtain this release, the taxpayer must pay off the tax debt in whole, or negotiate an amount acceptable to the IRS in satisfaction of the lien. Although less frequent, a Release of Federal Tax Lien may also be obtained upon submitting proof to the IRS that the statute of limitations has expired so that the lien is unenforceable or upon the IRS acceptance of a bond to secure payment of the debt.
2. Issuance of a Certificate of Discharge of Property from Federal Tax Lien (IRS Publication 783). In this case, the IRS agrees to release the lien as it applies to specified property only, and the lien will remain valid against all other property owned by the taxpayer. The IRS most commonly uses this procedure in cases where the taxpayer is selling the property at full value to a third party, and either all of the net proceeds of the sale (after normal sales costs and commissions) are paid to the IRS or the taxpayer has no equity in the property after taking into account the liens which are senior to the Internal Revenue Service’s lien. The application for a Certificate of Discharge from Federal Tax Lien (Publication 783) must be filed with the Collection Division’s Special Procedures Staff. The application must include an estimate of the fair market value and usually a written appraisal by a disinterested appraiser together with any other information requested by the IRS. Additional information usually includes a copy of the anticipated settlement statement prior to the settlement, which must be approved by the IRS. Unapproved alterations may result in a refusal by the IRS to issue the Certificate of Discharge.
3. Issuance of a Certificate of Nonattachment (Publication 1024) is normally used in a situation in which the party involved in the transaction is not the same person identified in a recorded tax lien, but has a similar name.
4. Issuance of a Certificate of Subordination of the federal tax lien (IRS Publication 784). The request must show that the amount realizable on the tax lien will ultimately be increased and collection facilitated as a result of the subordination. This method is most often used when dealing with a refinance of a borrower with a federal tax lien against them.