What Is a Federal Tax Lien Subordination?

If you have fallen behind on your federal taxes, your debt can snowball and quickly become unmanageable. Between IRS penalties and interest, your tax debt will start to grow faster than you can find the funds to pay it off.

In order to secure this debt, the IRS may file a Notice of Federal Tax Lien against your personal property or business property. This will make it nearly impossible to sell that property or get any loans.

A federal tax lien has priority over all your other creditors, so if the bank foreclosed on your home, for example, the money would first be used to pay off your tax debt, and then your mortgage company would get what was left. Because of this, if there is a tax lien against your property, creditors will not want to lend money to you. They know that the IRS will get paid first!

If you can’t pay off your tax debt right now, you may benefit from applying for a lien subordination. Under certain circumstances, the government will give up its lien position and allow other creditors to take higher priority, if it allows you to improve your financial situation and put yourself in a better position to settle your debt.

RELATED POST: Is There a Statute of Limitations on IRS Tax Liens?

Why Would You Want a Tax Lien Subordination?

Since a federal tax lien is at the top of the hierarchy when it comes to paying back debt, creditors will not want to lend to you. What’s worse is that the tax lien applies to both current and future assets, so the IRS will have a legal claim against any assets that you purchase or receive as gifts.

When you are approved for a tax lien subordination, other creditors are able to take priority over the IRS tax lien. The lien will stay in place and will not resolve until it is repaid, but you are able to get a loan or take out a second mortgage on your house.

Here are some of the main benefits of tax lien subordination:

• You are able to take out a loan and repay your tax debt.
• You can refinance your house and lower your monthly payments, freeing up cash to repay your tax debt.
• You can take out a second mortgage loan on your home, and use the money to repay your tax debt.

If you’re seeing a theme here, it’s that the IRS wants you to use lien subordination as a way to pay your tax liabilities. Part of the request for subordination includes telling the IRS how you will utilize lien subordination to pay off debt, and why a subordination agreement is in the best interest of the United States.

RELATED: How to Secure a Home Loan When Dealing With a Tax Lien

How Does a Subordination Agreement Work?

If you think that a lien subordination could be the right choice to help you pay off your tax debt, then there are some steps you need to take.

First, you must fill out the IRS form 14134, Application for Certificate of Subordination of Federal Tax Lien. To complete the form, you will need to decide between two options for subordination:

• Pay the IRS an amount equal to the lien or interest they are subordinating. For instance, if you refinance your home mortgage and realize additional equity, the IRS will expect to receive the amount of the additional equity in return for becoming a lower priority creditor.
• Increase the IRS’ interest payments by making collection of the tax liability easier. For instance, if you refinance your personal property to reduce your mortgage payment, you can therefore make bigger monthly payments against your tax liabilities.

You must submit the application at least 45 days before a loan settlement meeting. In addition, you must provide extensive documentation of the loan settlement.

If the IRS agrees with your plan, they will issue a Certificate of Subordination. You will need this document to secure credit from lenders.

If the application is rejected, you are able to appeal the decision using IRS form 9423, Collection Appeal Request.

As you can see, this process can be very complicated. Your best chance of success come from hiring someone who is an expert at the lien subordination application process. For this, you will want to find an experienced tax lawyer.

S.H. Block Can Help You Resolve Your Tax Debt

Our expert Maryland tax attorney, Stanley H. Block, has over 50 years of experience helping people like you resolve tax debt and improve their financial situation. Our team can assess your unique situation and advise you on your best course of action for your tax liabilities. You may benefit more from an IRS repayment plan, like an offer-in-compromise or an installment agreement.

If you have a tax lien on your property and are interested in filing an application for federal tax lien subordination, our qualified tax professionals will guide you through the process. We will make sure you’ve included all the right information and documentation for the best chance of success.

To get started finding relief from your tax liabilities, take advantage of our free consultation by calling (410) 872-8376 or completing our online form. We’ll help you move forward on reducing your debt and getting your tax lien released.

The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.