A federal tax lien can damper your ability to secure credit and your freedom to use your assets as you choose. However, lien subordination can make it possible for you to refinance loans, obtain new lines of credit, or use your assets in other ways to pay off your tax debts.
Learn more about when subordination may be a good option for you, how to apply, and how tax lien subordination can help you get caught up.
What is Federal Tax Lien Subordination?
Lien subordination is when a lien holder agrees to take precedence behind another lien holder. To give you an example, imagine that you own your home outright with no loans against it. The IRS issues a tax lien that attaches to your property. You would like to take a loan out against your home to pay off part of your tax debt, but the lender will not work with you unless the IRS agrees to subordinate its lien.
Pursuing a certificate of subordination can help you secure a new line of credit, refinance your property, or transfer it to a new owner. Essentially, tax lien subordination gives you access to financing by putting the IRS further back in line than other creditors. The lien is not cleared or eliminated. It is still in place, but in a way that allows you to access financing.
How Subordination Can Help You
When the IRS places a lien, taxpayers often find it impossible to refinance, get a new loan, or otherwise financially benefit from their property—for the most part, lenders will not agree to lend money against the property because they have minimal chance of getting paid when the IRS is ahead of them in line.
Subordination takes the risk out of the equation for the lender. Lien subordination can put you in a better position to eliminate lingering tax debt and become compliant with IRS regulations and requirements.
Getting a New Loan or Refinancing With Lien Subordination
When the IRS agrees to another lender go to the front of the line, this gives the lender more incentive to allow you to take out a new line of credit against your asset. As a result, you may be able to tap into your asset’s equity to pay off your tax debt.
Streamlining the Repayment Process
Repayment is often much easier for taxpayers who are able to take out new loans or refinance existing loans. For example, if you have substantial equity in your home, taking out a line of credit against it may allow you to make a lump sum payment towards your tax debt or even pay it off entirely.
Why the IRS May Agree to Lien Subordination
Tax lien subordination is not available to everyone. The IRS places liens to attempt to collect what it is owed, and that is still their ultimate goal when someone applies for subordination. Because of this, they only agree to subordination if doing so serves their best interests—that is, if subordination makes it more likely for you to pay your tax debt.
How to Apply for a Subordination Agreement
To apply for lien subordination, you must fill out Form 14134, Application for Certificate of Subordination of Federal Tax Lien. The process is straightforward, but it can be complicated if you haven’t navigated federal tax lien concerns in the past. That’s why many people choose to work with a tax lien attorney—they can help you convince the IRS that subordination is in their best interests and will help you pay off your tax debt.
You’ll start by filling out your personal information. If a third party is applying for subordination, they will fill out Section 2 as the applicant. If you are working with an attorney, include their information in Section 4 so the IRS can communicate with them regarding your application.
You must then provide information on the lender or finance company that is willing to refinance your loan or provide additional credit. The IRS requests information on the type of transaction, the amount of the existing loan, the amount of the new loan, and how much will be paid to the U.S. government as a result of this transaction.
Options Provided for Subordination
Section 7 deals with the basis for subordination. This is easily one of the most important parts of this form, so take your time filling it out. There are two primary ways to request subordination:
- You are willing to make a payment to the IRS equal to the lien or the government’s share of ownership in the property in exchange for the certificate of subordination
- You believe that receiving a certificate of subordination will make it easier for the government to collect the tax liability you owe
The first one is straightforward; you indicate how much of a payment you will make with the proceeds of your refinancing or line of credit in Section 6. But if you select the second option, you should also include a statement attached to your application. This statement is your chance to convince the IRS that agreeing to your subordination request will give them a better chance of recovering the money you owe.
Other Information Required for Form 14134
After you make your case for subordination, you can move on to describing the property for which you are requesting subordination. Include the address of the property if it is real estate or the address where the property is located if it is not real estate. You should attach a legible copy of your deed if it is real estate.
The IRS also requires an appraisal or valuation. You can submit a professional appraisal done by a disinterested third party, a county valuation of the property, an informal valuation by a disinterested third party, or a proposed selling price for property being sold at auction.
Other documentation you must provide includes:
- Copy of your federal tax lien
- Copy of your proposed loan agreement, if available
- Copy of current title report
- Copy of proposed closing statement
Finally, Form 14134 has space for you to include any other information that you feel may be relevant to the issue at hand and that may help the IRS make its decision.
Submitting Your Form 14134
After you sign and date Form 14134, double-check the additional documentation requested by the IRS and ensure that you have everything ready to submit. You can then mail the completed form and supporting documentation to:
IRS Advisory Consolidated Receipts
7940 Kentucky Drive, Stop 2950F
Florence, KY 41042
Tax Lien Subordination Timeline
For most people requesting federal tax lien subordination, securing a loan or getting a refinance request approved hinges on being able to secure subordination. To avoid unnecessary delays, submit your application at least 45 days before the date that you need the certificate of subordination.
What Happens Next
Within 45 days of submitting your application and documentation, you should receive an answer from the IRS. If any information or documentation is missing from your application, they may contact you to request clarification—so ensure that you promptly open all correspondence from them. If they approve your application, you receive the certificate of subordination.
Those who agree to pay the government’s interest in the lien receive the certificate after making that payment. Those who request subordination to improve the chances of repayment receive their certificate after the IRS processes their information. If your request is denied, the IRS will notify you and tell you why your application was denied. They will also send you Form 9423, Collection Appeal Request, and Publication 1660, Collection Appeal Rights.
Your Options If Your Application is Denied
After your subordination request is denied, you can pursue your right to appeal. You should submit your request within 30 days.
Differences Between Lien Subordination, Discharge, and Withdrawal
There are multiple ways to bypass a lien and put yourself in a better position to pay your tax debt.
- Lien subordination moves the IRS to the back of the line so that another lien holder can have a higher priority interest in the property.
- Lien discharge removes the the lien from one specific piece of property.
- Lien withdrawal is when the Notice of Federal Tax Lien is removed from public records.
None of these ends your responsibility for paying your taxes. The IRS will release a tax lien once your taxes are paid in full or the Collection Statute Expiration Date has passed.
Choosing the Best Option for Your Situation
The type of relief you seek depends entirely on the details of your situation. For example, if you want to sell a piece of property, lien discharge may be the best option. This excludes the property in question from the lien and allows you to sell it, at which point you can use some or all of the proceeds to pay your tax debt off in full or in part.
If you want to refinance or use your asset for a new line of credit, lien subordination could be the most suitable option. If you have entered into an installment agreement to satisfy the liability for the lien, withdrawal may be your recommended choice.
How a Tax Professional Can Help
With so many ways to address liens and attempt to get caught up on your tax debt, consulting a tax professional may be your next step. With the team at Wiggam Law, you can discuss your financial situation, explain how you want to change your lien so you can handle your tax debt, and figure out how best to move forward.
When you’re ready to take charge of your tax situation and start paying down your debt, we’re here to help you determine the best solution for you. Call us at (404) 233-9800 or fill out our online consultation form to schedule a meeting. You do not have to do this alone.