When taxpayers owe the IRS a significant amount of money, the agency may place a federal tax lien on their assets. This lien serves as a legal claim against a taxpayer’s property, making it difficult to secure loans, refinance a mortgage, or sell assets. However, the IRS offers options that allow taxpayers to navigate these financial hurdles. One such option is lien subordination, which allows another creditor’s claim to take priority over the IRS’s lien without removing it entirely. This article explores the concept of IRS lien subordination, how it works, and when it might be a viable solution for taxpayers dealing with a tax lien.
Understanding IRS Tax Liens
A federal tax lien can have serious financial consequences, making it important for taxpayers to understand how these liens work and what options may be available to manage them.
What is a Federal Tax Lien?
A federal tax lien is a legal claim the IRS places on a taxpayer’s property when they fail to pay their tax debt. It applies to all assets, including real estate, personal property, and financial accounts. Once the IRS files a Notice of Federal Tax Lien, it becomes public record, alerting creditors that the government has a claim to the taxpayer’s assets. This can create significant financial obstacles, as it signals to other lenders that the IRS has a legal right to the taxpayer’s property, making it more difficult to secure credit or complete financial transactions.
How Tax Liens Affect Taxpayers
A tax lien can make it difficult to obtain new credit or loans since lenders view it as a major risk. If a taxpayer tries to sell their home or refinance a mortgage, the IRS’s claim on the property must typically be satisfied before the transaction can proceed. The presence of a lien can also negatively impact a taxpayer’s creditworthiness, making financial recovery more challenging.
What is Lien Subordination?
Lien subordination is a process where the IRS agrees to allow another creditor’s lien to take priority over its own. This does not mean the IRS removes its claim. Instead, it shifts the order of payment, making it possible for a taxpayer to secure financing. This can be beneficial for taxpayers who need to refinance a loan, secure a new loan, or otherwise manage their financial situation more effectively.
How Lien Subordination Differs from Lien Discharge or Withdrawal
If you’ve ever dealt with an IRS lien, you may hear terms like lien subordination, lien discharge and lien withdrawal. What is the difference between these? We’ve already mentioned that lien subordination simply allows another lienholder to move ahead of the IRS in the order of claims. A lien discharge removes the IRS’s claim from a specific piece of property while a lien withdrawal eliminates the public notice of a lien. The lien still exists, but it is temporarily deprioritized to facilitate a financial transaction.
Why Would a Taxpayer Request Lien Subordination?
Taxpayers may request lien subordination to improve their financial flexibility. Subordination would allow them to refinance a mortgage, secure new loans, or facilitate the sale of a property despite having an IRS tax lien in place.
Refinancing a Mortgage
One of the most common reasons for seeking lien subordination is to refinance an existing mortgage. For example, suppose a taxpayer has a federal tax lien and wants to refinance their home loan to take advantage of lower interest rates. Without subordination, the IRS’s lien would remain in the first position, making it unlikely for the lender to approve the new loan. By agreeing to subordination, the IRS allows the refinancing to proceed, enabling the taxpayer to lower their monthly payments and improve financial stability.
Securing a New Loan
In some cases, a taxpayer may need to obtain a new loan, whether for business purposes, home repairs, or other financial obligations. Consider a business owner with a tax lien who needs additional capital to expand operations. If the IRS agrees to subordination, the lender can move forward with approving the loan, allowing the taxpayer to invest in growth while still addressing their tax liability.
Facilitating the Sale of a Property
Taxpayers looking to sell property that is subject to a lien may benefit from lien subordination if a potential buyer’s lender requires first priority on the asset. For instance, a homeowner with a tax lien may find a buyer ready to purchase their property, but the buyer’s mortgage lender insists on having the primary claim. If the IRS approves subordination, the sale can proceed, and the taxpayer can use the proceeds to partially or fully satisfy their outstanding tax debt.
How to Apply for IRS Lien Subordination
Applying for lien subordination requires careful preparation and submission of the necessary forms and documentation to the IRS, ensuring compliance with the agency’s requirements.
Required Forms and Documentation
To request lien subordination, taxpayers must submit Form 14134, Application for Certificate of Subordination of Federal Tax Lien, along with supporting documentation. Required documents may include a copy of the tax lien, loan agreements, property appraisals, and any other relevant financial statements. The application should include details about the property, loan terms, and the expected benefit to the IRS.
Submission Process and Timeline
The IRS reviews each application to determine whether the subordination request meets its criteria. The processing time varies, but taxpayers should allow at least 30 to 45 days for the IRS to make a decision. If the request is approved, the IRS issues a Certificate of Subordination, allowing the transaction to proceed.
IRS Criteria for Granting Lien Subordination
The IRS evaluates lien subordination requests based on specific criteria to ensure that the agency’s interests are protected while also providing taxpayers with financial flexibility. Understanding these requirements can help taxpayers determine whether they qualify and how to strengthen their application.
Ensuring the IRS Receives a Benefit
For the IRS to approve a lien subordination request, the agency must determine that it will receive some benefit. This typically falls into one of two categories:
- The IRS receives payment equal to the value of the subordinated interest, such as when a portion of a refinanced loan is used to pay down tax debt.
- The subordination enhances the taxpayer’s ability to pay, such as when a refinance lowers mortgage payments, freeing up funds to address tax liabilities.
The Role of the Lender
A lender must be willing to proceed with financing even with the presence of a subordinated lien. The IRS will consider the terms of the loan and whether the lender is taking on undue risk.
Alternatives to Lien Subordination
It’s important to note that lien subordination is not the only option available to taxpayers. As mentioned, there is also IRS lien withdrawal and lien discharge. Alternatively, taxpayers may want to look into other tax resolution options.
Lien Withdrawal
If a taxpayer meets certain conditions, they may qualify for a lien withdrawal, which removes the public notice of the lien while the tax debt remains due. This can be beneficial for credit purposes. This is typically easier to obtain than subordination, but it still requires meeting specific criteria, such as full payment of the tax debt, being in an active installment agreement, or meeting certain hardship criteria.
Lien Discharge
In some cases, the IRS may issue a lien discharge, which removes the lien from a specific piece of property. This is typically granted if the IRS determines that it will still be able to collect the debt from other assets. Qualifying for a lien discharge can be challenging and typically requires the taxpayer to either pay off the debt or demonstrate that the value of the property is less than the tax liability. In some cases, it’s easier if the taxpayer is selling the property to a third party.
When to Seek Professional Help
You should seek help for IRS lien subordination if you’re facing challenges with refinancing or selling your property due to a federal tax lien, and you believe subordination is the best way to move forward. Since the IRS only approves lien subordination in specific situations—such as when it’s in the best interest of the taxpayer and the government—you may need professional assistance to navigate the complex process. A tax professional can help assess whether your situation qualifies, assist with the paperwork, and communicate with the IRS to maximize your chances of success. If you’re unsure about your options or how to approach the process, seeking help early can prevent delays and ensure you’re taking the right steps to protect your financial interests.
Tax Help with IRS Lien Subordination
IRS lien subordination provides taxpayers with a strategic way to manage financial transactions without eliminating the IRS’s claim to their assets. Whether seeking to refinance a mortgage, secure a loan, or facilitate a property sale, taxpayers can benefit from understanding the subordination process and how it affects their ability to obtain credit. Given the complexities of tax liens and subordination, consulting with a tax professional can help ensure the best possible outcome when navigating this financial challenge. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
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