Discharge of IRS Tax Liens In Connection With A Florida Short Sale Part II

Federal tax liens are not automatically discharged upon short sale. The IRS has the power to object and prevent the sale if there is a federal tax lien on the property. A short sale will not necessarily discharge a tax lien but the taxpayer has the option of applying for such discharge if certain conditions are met.

A short sale would entail the lender reducing the outstanding balance on the mortgage. The property would then be sold for less than the remaining balance on the mortgage. The proceeds of such a sale would be applied against such balance.

To begin the short sale process, the borrower and lender enter into negotiations in order to discount the mortgage and determine whether the sale of such property will be in full satisfaction of the debt. However, the lender holding the first mortgage on the property may not be the only party that has a lien on the property. Other parties with liens on the property will also have to approve the short sale.

Due to the requirement that junior lien holders approve the short sale the IRS may prevent the sale or delay the process, which may result in having the property foreclosed on before a resolution between the parties. To mollify this risk, it would be in the taxpayer's best interest to apply for the discharge of the lien as quickly as possible.

IRC Section 6325 provides the parameters governing when a taxpayer may seek discharge of the tax lien. The most relevant IRC statute for a short sale would be IRC Section 6325(b)(2)(B) which provides that a discharge may be issued when the government's interest has no value.

This would be the case where the debts senior to the tax lien exceed the sale price or fair market value of the property, which would necessarily be the case in a foreclosure of the property. To recover under this section in the case of a short sale, the taxpayer would have to show that the government's interest has no value. To effectuate this, the taxpayer must file an application for Certificate of Discharge of Property from Federal Tax Lien.