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A tax llien has no effect on a foreclosed property, so the new owner can request the lien be removed from the property. It does not remove your obigatn to pay the tax, however.
You are eligible for the mortgage forgiveness only if your lender cancels the debt during 2012 by sending you a Form 1099-C.
I know I am still obligated topay the lien. Since I am in the "Uncollectible staus" with the IRS I should not be forced to pay it still??
To be elibible for mortgage forgiveness can the property be in forclosure and would I be eligible for the forgiveness or not until it is sold??
A lien is a public document that shows an interest in tangible or real property.
If you are in Temporarily Uncollectible status, that will not change.
Mortgage forgiveness laws don't apply until a debt has been canceled, which, under ordinary rules, would mean that it is taxable income. Mortgage forgiveness has nothing to do with a bank "forgiving" you. It has to do with the IRS forgiving you the income on the canceled debt.
I'm not sure what you are trying to accomplish exactly.
A foreclosure: You lose the house and the IRS gets nothing because the house sale will not clear the loan balance.
A short sale: You sell the house and the IRS gets nothing because the house sale will not clear the loan balance.
Only difference: short sale you have to negotiate with the seller, the agent, the lender, the bank, and the IRS to clear the lien so you can sell. Foreclosure: Not your problem any more.
None of these has anything to do with a canceled debt.