To understand IRS lien subordination, you must first know what a tax lien is. Simply put, a federal tax lien is the U.S. government’s legal claim against your property when you fail to pay a tax debt. When the IRS files a Notice of Federal Tax Lien, it puts other creditors on notice that you owe back taxes. It can apply to all types of property, such as real estate, personal property, and financial assets.
Liens typically follow the “first in time, first in right” concept, which states that the lien recorded first has higher priority than those recorded later. The idea of “first in time, first in right” can complicate the process of dealing with a tax lien, particularly when you’re trying to refinance your mortgage to settle your back taxes. Lower-priority creditors will be highly reluctant to refinance your property because, as a new creditor, they will have to wait for payment until the IRS tax lien is paid. One way to deal with a federal tax lien is by requesting IRS lien subordination.
Key Takeaways
- Tax lien subordination doesn’t remove the lien; it just rearranges its priority.
- This tool is particularly valuable for refinancing or securing funds when under an IRS lien.
- You must submit Form 14134, supported by solid documentation and justification based on either payment or IRS collection benefits.
- Documentation includes appraisals, loan terms, title reports, etc.
- Don’t wait—file at least 45 days before you need the subordination certificate.
- Denied? You can appeal the decision.
What is IRS Lien Subordination?
IRS Lien Subordination refers to a process by which a previously filed IRS tax lien can be moved lower in priority, allowing other creditors to move ahead in the payment line. This means that while the tax lien still exists, other creditors can receive payment first from the proceeds of the property.
Lien subordination is not automatic or necessarily easy to obtain. It requires applying to the Internal Revenue Service (IRS), along with a compelling reason why subordination would be in the government’s best interest. It’s in the government’s best interest when lien subordination will help collect the taxes owed. This standard is met when the IRS receives the proceeds from new financing, or the lien subordination enables the taxpayer to increase the monthly installment payments.
Why is IRS Lien Subordination Important?
From the taxpayer’s perspective, an IRS lien can be a significant hurdle when attempting to refinance a mortgage or secure additional financing. Lenders are often reluctant to extend credit when there is a risk of not being first in line to be paid back. In these cases, a taxpayer may request a lien subordination to make the transaction more attractive to lenders.
From the lender’s perspective, the subordination of a tax lien can make the difference between a viable and nonviable loan. A lien subordination makes their claim more secure, increasing their chances of recovering their funds if the borrower defaults.
Examples of Lien Subordination
The following scenarios illustrate when the IRS will typically grant lien subordination:
- Cash-out refinance: Lissette owns a home with a fair market value of $400,000 and has an outstanding mortgage of $240,000. She can refinance up to 80% of the home’s value ($320,000) with a new bank. After $10,000 in closing costs, she receives a $70,000 payout to put toward her tax liability of $100,000. Therefore, the IRS agrees to subordinate the federal tax lien in favor of the new mortgagor.
- Rate reduction refinance: Brandon pays $1,800 monthly for a home mortgage, $200 of which goes toward private mortgage insurance (PMI). He refinances to lower the interest rate and remove the PMI. He has a new monthly payment of $1,300, and the IRS subordinates the lien in favor of the bank, as Brandon will now pay an additional $500 monthly toward his back tax liability.
When a taxpayer wishes to keep some of the proceeds from refinancing for their use, they will need to provide the IRS with a reason why it will facilitate the collection of the tax. This can be a difficult threshold to achieve.
The Process of IRS Lien Subordination
To begin the IRS lien subordination process, the taxpayer must complete and submit Form 14134, Application for Certificate of Subordination of Federal Tax Lien. This document provides the details of the requested subordination, including the reason for the request and the benefit to the IRS. Attaching supporting documents, such as appraisals, loan agreements, or other related documents that may help substantiate the application, is also essential.
The IRS will then review the application, consider why you believe a subordination is in its best interest, and make a decision. They will issue a Certificate of Subordination if they agree to the subordination. However, it’s important to understand that this doesn’t remove the lien; it merely changes its priority status. The IRS suggests you submit your application at least 45 days before the transaction date when the certificate of subordination is needed. If your application is denied, you can appeal the denial by filing Form 9423, Collection Appeal Request.
Resolving Your Tax Problems
IRS lien subordination can be an instrumental tool for taxpayers to secure financing, despite having a tax lien on their property. It also assures lenders of their rightful place in line to collect repayment.
However, navigating the process can be complex and requires a clear understanding of the lien subordination process. Utilizing our tax resolution experts to help with IRS lien subordination can make the difference in successfully completing the transaction. Call us today at 866-550-7655 to learn more about how we can help!
IRS Lien Subordination FAQs
Does subordination remove my tax debt?
No, it only rearranges lien priority. It puts other creditors ahead of the IRS. This makes it easier to refinance your property. The IRS lien remains until the debt is fully paid or otherwise removed.
Is a lien discharge the same as lien subordination?
A lien discharge differs from subordination in that it a discharge removes the lien from a specific property, but it still attaches to other property you own.
Does IRS lien subordination guarantee loan approval?
No. Subordination clears the way for a lender to consider your application, but approval still depends on your creditworthiness, property value, and the lender’s underwriting requirements.
Can I request lien subordination if I’m already in an installment agreement with the IRS?
Yes. Being in an installment agreement doesn’t prevent you from applying for lien subordination. In fact, subordination may make your installment payments more manageable by freeing up cash through refinancing or lower loan payments.
Does lien subordination affect the statute of limitations on IRS collections?
No. Subordination does not extend or shorten the IRS’s 10-year collection statute. The lien remains enforceable until the debt is paid in full, settled, or the statute of limitations expires.