What Is Tax Lien Subordination?
If you don’t address your federal tax debt, you could have to deal with a federal tax lien, which is when the IRS makes a claim against your property because of the taxes you owe.
In some cases, you can request tax lien subordination, which gives another creditor priority over the IRS to one or more of your assets. This makes it easier to use your asset(s) as collateral on a loan so that you can pay off your taxes. These concepts can get complicated, so this page walks you through everything you need to know about tax lien subordination.
If you still have questions, contact the team at Seattle Legal Services to speak to a tax expert about how to resolve your tax problems.
Key Takeaways:
- A federal tax lien gives the IRS a legal claim to your property when you fail to pay taxes.
- Tax lien subordination allows another creditor’s lien, like a mortgage lender, to take priority over the IRS’s lien.
- Subordination can be necessary when refinancing or securing a loan, since lenders typically won’t approve financing if the IRS’s lien has first priority.
- To request subordination, submit IRS Form 14134 with supporting documentation at least 45 days before your financial transaction.
- Alternatives to subordination include making full payment, property discharge, or lien withdrawal.
What Is a Federal Tax Lien?
A Notice of Federal Tax Lien is a public record that shows other creditors that the government has an interest in and legal right to your property. Property may include:
- Your home or other real estate you own.
- Your car.
- Your boat.
- Your business property.
- Any other personal or real property that you own.
A tax lien is one of the consequences of failing to pay your tax bill. When you first miss a deadline or don’t pay the full amount owed, the IRS will send you notices about your bill, plus any penalties and interest charges you’ve incurred. If you don’t respond or pay what you owe, the next steps will be escalated collections actions, including filing a federal tax lien and issuing a tax levy, which is asset seizure.
If the IRS moves forward with a tax levy, it could seize your wages and financial accounts as well as your physical assets. A tax lien lays the legal groundwork for the IRS to seize your assets, but luckily, there are a few ways to reduce the negative effects of tax liens.
Tax Lien Subordination: An Overview
Subordination is when the IRS agrees to place its lien behind other creditors’ liens. In other words, the IRS agrees to subordinate its lien so that other creditors have higher priority.
If there are multiple liens on a piece of property, there are legal rules about which liens take priority. For example, say you have a mortgage on your home, and then the IRS issues a federal tax lien. In this scenario, the mortgage lender has first priority, and the IRS is second in line.
If you sell the home, the mortgage lender is first in line for the proceeds. If there is any money left after they’re paid off, it goes to the IRS. Finally, if there’s any money left after that, it goes to you. The same thing happens if the bank forecloses against the home – the bank gets paid first, then the IRS, and so forth if there are any additional lien holders.
Imagine, however, that you own some real estate outright. There are no lenders with liens against that real estate. But when the IRS issues a federal tax lien, it attaches to that property. You want to use the property as collateral to get a loan to pay off your taxes, but the only way the lender will approve your loan is if their lien takes priority over the IRS. For this to happen, the IRS must agree to lien subordination.
This exact same process also applies if you want to borrow against the equity in your home. You will need to convince the IRS to take a backseat to the lender, or you won’t be able to get the loan.
When Would You Subordinate a Tax Lien?
Tax lien subordination opens up your options so you can:
- refinance an existing property loan or home mortgage,
- take out a second mortgage, or
- take out a loan using your property or other assets as collateral.
You may need to rely on one of these approaches to pay off your tax debt.
How to Subordinate a Tax Lien
Requesting tax lien subordination is fairly simple, requiring just a few steps. You’ll use Form 14134, Application for Certificate of Subordination of Federal Tax Lien, to submit your request to the IRS. The form states that you should submit your application at least 45 days prior to when you need the certificate of subordination.
Here is a step-by-step guide to completing this form and finalizing your application:
Section 1: Taxpayer Information
Here, provide your basic personal information, including name, address, phone number, and Social Security number (or other tax ID number). If you are not the taxpayer, include only the taxpayer’s information in this first section.
Section 2: Applicant Information
If you are completing the application for someone else, you will put your information in Section 2. If you are the taxpayer and the applicant, check the box that says “Check if also the Taxpayer” in this section.
Section 3: Property Owner
List the property owner’s name if it’s different from the taxpayer or applicant. If you are the applicant and the property owner, check the applicable box.
Section 4: Attorney/Representative Information
In this section, include information about your attorney, your lender, or the taxpayer, depending on who is representing you. Indicate whether you are including Form 8821 or Form 2848 regarding power of attorney with your application.
Section 5: Lending/Finance Company
Here, include your lender or institution applicable to the subordination request. You’ll need the company name, contact name, and phone number, and the type of transaction you’re trying to perform, such as consolidating your loans or refinancing.
Section 6: Monetary Information
Provide the details of your finances applicable to the situation, including the amount of your existing loan if you’re refinancing or the amount of your new loan.
Section 7: Basis for Subordination
This section requires a bit more knowledge about the Internal Revenue Code. The IRS grants subordination under either 6325(d)(1) or 6325(d)(2):
- 6325(d)(1): This section applies if you “pay an amount equal to the lien or interest to which the certificate subordinates the lien of the United States.” For example, say you’re refinancing your home, which results in more equity. You must then pay the IRS the amount of that extra equity since the government is agreeing to allow another creditor to be the higher priority.
- 6325(d)(2): This section applies if “the IRS determines that the issuance of the certificate will increase the amount the government realizes and make collection of the tax liability easier.” For example, if your refinancing arrangement results in a lower monthly mortgage payment, you will then have more funds to pay down your tax debt.
Talk to a tax attorney about what you should select under Section 7 of your application when you’re unsure. If you select the second option, you’ll need to sign and date a separate statement with your application that indicates more about the details of how the IRS will receive payment.
Section 8: Description of Property
In this section, list what you will use as collateral for your new loan or financing endeavor applicable to the request. For example, describe the type of property if it is real estate, or list details about a vehicle, like the serial number. Provide the address where the property is located, and if applicable, include a copy of the deed or title.
Section 9: Appraisal and Valuations
With your application, you’ll need to attach either an appraisal of the property or one of the following documents:
- County property valuation
- Informal valuation by disinterested third party
- Proposed selling price if being sold at auction
In this section, indicate which document you’re attaching.
Section 10: Copy of Federal Tax Lien
Indicate that you have attached a copy of the tax lien, or provide the lien numbers on your document.
Section 11: Copy of the Proposed Loan Agreement
Indicate that you have attached the proposed loan agreement and describe “how subordination is in the best interest of the United States” in the space provided.
Section 12: Current Title Report
Indicate that you have attached the title report, which is required. If you haven’t attached it, provide details about liens or claims against the property and whether the government is below them in priority.
Section 13: Copy of Proposed Closing Statement
Indicate that you have provided a copy of the proposed closing statement (HUD-1), or itemize proposed costs, commissions, and expenses related to property refinancing.
Section 14: Additional Information
Indicate whether you have attached any other documents with your application. Examples are court documents, affidavits, or explanations about unusual situations.
Section 15: Declaration
Sign and date your application.
Mail your completed form and attachments to this address:
IRS Advisory Consolidated Receipts
7940 Kentucky Drive, Stop 2850F
Florence, KY 41042
Making Your Payment or Appealing a Rejection
After submitting your application, the IRS may accept your request and move forward with the payment option you indicated. For the first option, you’ll send your payment after the Advisory Group Manager reaches out about how much you owe and where to pay. For the second option, you don’t have to send a payment right now.
If your application is denied, you can file an appeal. The IRS will send you Form 9423, Collection Appeal Request, and Publication 1660, Collection Appeal Rights, which outline the process. Be sure to walk through your situation with a tax expert so you do everything properly when appealing.
Alternatives to Tax Lien Subordination
So, what do you do when you have a tax lien and want to get rid of it? There are a few alternative options for dealing with a federal lien. Here’s a brief overview:
Pay Your Balance in Full
The fastest way to get the federal tax lien removed is to pay off your tax debt. Once your balance is paid in full, the IRS will release the lien within 30 days.
Discharge of Property
A property discharge removes the tax lien from your property. There are a few ways that the IRS may agree to a discharge:
- If your remaining property under the lien is at least twice as much as the federal tax liability secured by the lien
- If the tax liability is partially satisfied with a payment amount that is at least the value of the government’s interest in the property being discharged
- If the government’s interest in the property has no value
- If the IRS agrees to allow a sale of the property
- If a third-party property owner makes a deposit or acceptable bond that’s equal to the government’s interest in the property
Once you know the option that applies to you, complete Form 14135, Application for Certificate of Discharge of Federal Tax Lien.
Withdrawal
A tax lien withdrawal removes it and takes the IRS off your creditors list. You can qualify for withdrawal if you’ve paid your tax liability, the IRS releases your lien, and you’ve been in tax compliance for the last three years and are current on all tax payments.
You may also qualify for withdrawal if you have a direct debit installment agreement in place, owe $25,000 or less, and are otherwise in tax compliance.
Other reasons you could request a lien withdrawal include:
- The IRS didn’t follow procedures when filing the federal tax lien
- Withdrawal will lead to the IRS’s collection of the tax liability
- The withdrawal is in the best interest of the taxpayer and the government
Talk to an expert about your options for payment, discharge, withdrawal, or subordination.
Contact Seattle Legal Services for Tax Lien Assistance
Federal tax liens are public records that may impact your credit score. Subordination could be the right option to help you get on top of your debt.
At Seattle Legal Services, our experienced tax attorney works closely with you to understand your situation and goals. We’ll help you navigate tax law and complex IRS processes for getting back in good standing and requesting tax lien subordination. We also help with filing an appeal or setting up a tax resolution option that you qualify for.
Contact Seattle Legal Services today to speak to a tax professional.
Sources:
https://www.irs.gov/pub/irs-pdf/p784.pdf
https://www.irs.gov/pub/irs-pdf/p1153.pdf
https://www.irs.gov/pub/irs-pdf/p594.pdf
https://www.irs.gov/pub/irs-pdf/p783.pdf
https://www.irs.gov/pub/irs-pdf/f12277.pdf
https://www.irs.gov/businesses/small-businesses-self-employed/understanding-a-federal-tax-lien