Federal Tax Lien Subordination: Letting Other Creditors Take Priority in Front of the IRS

An IRS tax lien subordination keeps the tax lien in place but permits another creditor to move ahead of the IRS in priority. Consequently, subordination may allow you to get a loan or refinance your mortgage. You must ask the IRS to subordinate its lien and explain how that will help you pay your tax debt. The IRS generally will not agree to subordination unless doing so is in the best interest of the government. To help you out, this guide outlines the essentials, or you can use TaxCure to find a tax professional to help you today. 

Key takeaways

• What is lien subordination -- When the IRS agrees to put its lien behind other creditors' liens in priority.
• When to request subordination - If you want to borrow money against an asset, so that you can pay off your tax liability.
• How to use subordination to make payments - Alternatively, you can refinance existing loans to get lower monthly payments, so you can make higher monthly payments to the IRS. 
• Lien priority -- Generally, liens take priority based on the order they are filed.
• Other options - Consider lien discharge (removal from a specific piece of property), withdrawal (withdrawal from the public record), or release (lien no longer exists) if subordination isn't the right solution.

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

Subordination is when the IRS agrees to subordinate its lien to other lien holders. In other words, the IRS lets another lienholder take priority in front of the IRS's lien.

For example, say that you own a truck worth $70,000. You don't have a vehicle loan, so there are no liens against it. But then you incur a tax liability, and the IRS files a tax lien against you. You don't have any money to pay off the tax debt, but you have good credit and could use the truck as collateral. However, the lender will not give you the money while the IRS lien is in top priority against the truck. To get the loan approved, you must get the IRS to subordinate its lien behind the lender. Once that happens, the lender will give you the cash, you can pay the IRS, and the IRS lien will be released.

How does lien priority work?

Typically, lien priority is on a first-come, first-served basis. Here's an example. Let's say you buy a house using a mortgage loan. The mortgage lender has a lien against the home for the amount owed on the mortgage. Then, you fail to pay your property taxes, so the county issues a property tax lien against the home. You also fail to pay your taxes, and the IRS files a Notice of Federal Tax Lien. Finally, you default on a credit card, and the creditor takes you to court and gets a lien against you. These liens all take priority in the order they were established. 

Now, imagine that you sell the home or if the bank forecloses against you and auctions off the home. The proceeds of the sale go to the lienholders in order -- first, the mortgage company, then the county, then the IRS, and finally, the credit card company.

However, there are exceptions to that rule. For instance, IRS tax liens often take precedence over liens related to unsecured debt, regardless of when they were filed.

Does subordination remove the lien from the public record?

The IRS tax lien will remain attached to the property. However, it will have a lower position than the new lender’s security interest. The lien will also continue to exist as a public record, and it will continue to have its currently established priority on any other assets you own.

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 property. 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.

Reasons to Request Lien Subordination

The main reason to request subordination is so that you can take a loan out against a piece of property to pay off your taxes. For example, you may want to request IRS lien subordination so that you can:

• Take out a home equity loan.
• Get a home equity line of credit.
• Refinance your mortgage to get cash to pay off the IRS tax debt.
• Refinance your mortgage to get lower monthly payments so you can make payments on the debt. 
• Take out a loan against another piece of real or personal property so that you can pay your tax debt.

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 to Request a Federal Tax Lien Subordination

To apply for lien subordination, file Form 14134. You will need to share details about the property you want the IRS to subordinate its lien interest on, the loan you're applying for, and how much you'll pay the IRS after you get the loan. You generally also need to include loan paperwork, closing dates, and other details as requested. There are details instructions in IRS Publication 784.

For example, say that you're requesting lien subordination so that you can get a home equity loan. You need the value of the home, the current mortgage info, the amount you're going to borrow, and how much you plan to pay the IRS -- note that the IRS will generally only agree to subordination if they are getting all of the loan proceeds (up to the amount of your tax debt, interest, and penalties). If you need assistance, contact a tax professional for help completing and filing the form and the necessary attachments.

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 its interest if it increases the amount the agency will get paid. 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.

What If the IRS Denies Your Subordination Request?

Then, you have the right to appeal through the Collection Appeals Program -- note that this is different than the process you use to appeal the filing of a lien. If the IRS denies your request for subordination, you should ask to talk with their manager. If the manager says no or doesn't respond to you within two days, you can submit a collection appeal request using Form 9423. This should be postmarked within three days of the date you were told no by the manager.

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 taxes. For estate tax liens (not discussed above), use Form 4422 if selling or Publication 1153 if you are refinancing.

What if the IRS doesn't respond to your request for subordination?

If you cannot get help from the IRS in the usual channels, you can ask for help from the Taxpayer Advocate Service. The TAS helps taxpayers when they experience long IRS delays or miscommuncations. They cannot help if your issue is being addressed by the agency in a timely manner.

Alternatives to Lien Subordination

Lien subordination is one option that can be extremely helpful in the right situations, but it is not the only way to deal with a federal tax lien. Here are some other options that you may want to consider:

• Discharge -- Remove the lien from a single piece of property. For example, if you want to sell property and use the proceeds to pay the IRS. 
• Withdrawal -- Removes the public record of the lien, but the lien continues to exist. For example, if you set up a direct debit installment agreement and owe less than $25,000, the IRS will withdraw the lien as soon as you make three monthly payments.
• Release -- The lien no longer exists. Generally, you can only get the lien released if you pay the tax in full, prove that the lien was issued in error, or satisfy the terms of an offer in compromise.

What if you can't pay in full and don't qualify for lien subordination, release, discharge, or withdrawal?

Then, the lien will continue to exist until you satisfy the tax liability or the tax debt expires (typically, that happens about 10 years after the tax is assessed). The IRS may decide to move forward with garnishing your wages, seizing your assets, or taking other involuntary collection measures against you. To stop the IRS from involuntarily collecting the debt, consider these options: 

• Installment agreement - Make monthly payments until you pay the tax liability in full. You can spread your payments out until the CSED. If you owe less than $50,000, you can apply online. 
• Partial payment installment agreement - If you can't afford the minimum monthly payment on a regular installment agreement, you can make smaller monthly payments, and ultimately, settle some of the tax debt once you reach the expiration date. To qualify, you must provide detailed financial information, and the IRS will review your financial details about every two years.
• Offer in compromise -- Pay a settlement and get out of tax debt for less than you owe. You will need to provide detailed financial info to qualify. Once you satisfy the terms of the agreement, the IRS will release the tax lien.

There are also other options that apply in select situations. For instance, if the tax debt is due to income that your spouse or former spouse underreported without your knowledge, you may qualify for innocent spouse relief. That removes your liability for your spouse's portion of the debt and could potentially free you from tax liens associated with that debt.

Get Help With Lien Subordination and Other Resolution Options for IRS Tax Liens

Start your search below to find the most qualified tax professional to help with a lien subordination or another solution. Start the search by selecting the applicable agency or agencies and select your specific problem (for example, tax lien) and/or your desired solution (for example, lien subordination or lien discharge) to only see the top-rated pros that have that particular experience.