Why and How to Apply for a Federal Tax Lien Subordination

federal tax lien subordinationAn IRS tax lien encumbers all of your property, even if you aren’t aware that the tax lien exists. The tax lien is not an immediate collection action. You still get to keep the property subject to one, but you may not be able to sell or refinance the property unless you eliminate the tax lien.

The easiest way to get rid of an IRS tax lien is to pay off all of your tax debt. If you can’t pay the full debt, you have other options.  Two other popular options pertain to requesting a lien discharge or lien subordination.

A tax lien discharge completely removes the lien from a specific piece of property. A Federal tax lien subordination keeps the tax lien in place but permits another creditor to move ahead of the IRS in priority. Consequently, it may allow you to get a loan or refinance your mortgage.

What is a Subordination When it Comes to IRS Tax Liens?

When you get a loan, some creditors take a security interest in your property. The most common example is a mortgage, where a creditor takes a security interest in your home. If you don’t pay your mortgage, the security interest gives the creditor the right to foreclose on your home.  Your home becomes the collateral to the lender.

Several creditors can have a security interest in the same property, but their interests are ranked according to priority. Your first mortgage lender would have a higher priority than a second mortgage lender, which means that they get paid first from the proceeds of a foreclosure auction.

If you have an IRS tax lien on your property, that lien will take priority over any loans you receive after the tax lien exists. Creditors may not wish to give you a second mortgage loan because their security interest will be inferior to the IRS tax lien interest.

An IRS tax lien subordination is an agreement that allows a new creditor to move ahead of the IRS in priority. The IRS tax lien will remain on the property. However, it will have a lower position than the new lender’s security interest.

What Happens If the IRS Subordinates a Tax Lien?

The IRS will issue you a Certificate of Subordination. It permits a junior creditor to move ahead of the IRS tax lien in priority.

However, the IRS tax lien remains in place on this priority. The tax lien also stays in place on all of your other real and personal property, and you still owe your tax liability in full, including interest and penalties.

An IRS lien subordination does not solve your tax debt problems. But it could allow you to get a loan or refinance your home, which could free up more money to pay off your tax debt.

You may want to talk to a tax professional about what you can do to reduce your tax debt. You may be eligible to negotiate an Offer in Compromise or an installment payment agreement.

Why Would a Taxpayer Want to Subordinate A Tax Lien?

You may not be able to get a loan or refinance an existing mortgage while the IRS tax lien is in place. If you get a Certificate of Subordination, then a creditor may be willing to extend credit.

You may wish to get a second mortgage loan and use the money to pay off your tax debt, or you could refinance your existing mortgage to lower your monthly mortgage payments. A tax lien subordination can also apply to assets besides your home, including business property.

If you want to sell the property encumbered by the IRS tax lien, a lien subordination probably won’t help. You may have to request a discharge of an IRS tax lien to complete the sale.

How Can a Taxpayer Request a Federal Tax Lien Subordination?

Apply for a certificate of subordination of federal tax lien by following the instructions in Publication 784. You will need to complete Form 14134. It is also a smart idea to watch this self-help IRS video. It is important to apply at least 45 days before a loan settlement meeting. Moreover, you need to provide the IRS the documentation for the settlement meeting.  If you need assistance, contact a tax professional for help completing and filing the form and the necessary attachments.

You will need to provide the IRS  a basis for subordinating the lien. The IRS will only agree to the lien subordination if it is in their best interests.

There are two main reasons that the IRS will agree to issue you a certificate of subordination:

  • The IRS may subordinate the tax lien if you agree to pay them an amount equal to the interest they are subordinating. Refinancing a mortgage will give you an additional $20,000 in equity, with $5,000 in closing costs, the IRS will expect to receive $15,000 in return for subordinating their interest to the refinanced mortgage. This way the IRS is not losing any value, and you can refinance your loan.
  • The IRS may subordinate their interest if it increases the amount they will realize. It could be the case if you refinance a loan with lower monthly payments, which allows you pay more each month to the IRS. You need to show that granting the lien subordination will make it easier for you to pay the IRS.

Can You Appeal a Denial of a Request for a Subordination?

You have appeal rights after a denial of a request for lien subordination. You may first attempt to talk to the manager of the IRS employee who denied your request. If they don’t grant your request or respond to your inquiry, you can submit a collection appeal request using Form 9423.

Contact a tax professional for help filing your lien subordination request. If the IRS grants your application, you could improve your financial situation and get closer to paying off your tax debt. For estate tax liens (not discussed above), use Form 4422 if selling, or Publication 1153 if you are refinancing.