How IRS Tax Lien Subordination Can Help You Pay Off Your Taxes

If you have unpaid taxes, the IRS may issue a tax lien — typically, the agency only issues a lien if you owe over $10,000, but it can issue liens for any amount of unpaid taxes. 

Federal tax liens are public records, and they attach to all of your real and personal property. This means that if you sell an asset, the IRS has a legal right to the proceeds. It also means that lenders will not let you borrow against your assets while the lien is in place. 

A lien subordination, however, can make it possible to use your assets as collateral. Wondering if you need a lien subordination? Want to know how to apply? Curious about alternatives? Then, keep reading for an overview. Or contact us directly to get help now.

Lien Priority and How Liens Attach to Assets

When you have multiple liens on the same property, they take priority in a very specific order. Generally, their priority is based on the order they are issued, but there can be exceptions to the rules. 

To give you an example, imagine that you take out a loan to buy a car. The lender has a lien on your vehicle, and that stays in place until you pay off the loan in full. If you default on the loan, the lien gives the lender the right to seize your vehicle. If the IRS issues a tax lien against you, it typically takes priority behind the lender’s lien.

Here’s another example. Say you buy a home with a mortgage loan. The mortgage lender has a lien against your property. Surprisingly, however, this lien doesn’t take first priority. In most states, if you don’t pay your property taxes, the property tax lien takes priority in front of the mortgage. Then, if you take out a second mortgage or a home equity line of credit, that falls into third place. 

How Federal Tax Lien Subordination Works

Now that you understand the basics of lien priority, let’s look at how subordination works. Lien subordination is when a lien holder agrees to take priority behind another party. 

To illustrate, imagine that the IRS issues a federal tax lien for your unpaid taxes. The lien attaches to the equity in your home. You apply for a home equity loan, but when the lender sees that you have a tax lien, they deny your loan request.

This happens because the tax lien is effectively preventing the lender from using your home as collateral. However, if you convince the IRS to subordinate its lien, that allows the lender to take first priority. As a result, the lender will be more likely to approve your loan.

Here’s another example. Keep in mind that federal tax liens apply to your current and future assets. Say that you owe $250,000 in unpaid taxes, and when the IRS issues a federal tax lien, you didn’t have any assets. However, a few months later your father dies and you inherit a house. You don’t want to sell the home, but you are willing to take out a loan against it so that you can pay your taxes. 

Again, however, you will need to get the IRS to subordinate its lien. The lender will only approve your loan if you can use the home as collateral, but of course, that isn’t possible if the IRS already has a lien against the property. 

Note that lien subordination never guarantees loan approval. You also have to meet the other requirements for approval.

How IRS Lien Subordination Can Help You Pay Your Tax Debt

As explained above, lien subordination is a strategy that can help you take out loans against your assets, but how does this help you pay off your tax debt? Ultimately, it can work in two different ways:

1. You take out a loan against your asset. Then, you use the funds to pay off your tax liability in full or to pay the lump sum on an offer in compromise. 
2. You refinance your home or another loan to reduce your monthly payments. Then, you use the extra money to make monthly payments on an IRS installment agreement. 

The IRS will not subordinate your tax lien unless you convince the agency that doing so is in its best interest. In other words, you need to convince the IRS that the lien subordination will allow you to pay your tax debt. 

How to Apply for Lien Subordination

To apply for a lien subordination, file Form 14134 (Application for Certificate of Subordination of Federal Tax Lien). If you’re trying to take out a loan, you must file this form at least 45 days before the loan settlement meeting. 

When you fill out this form, you need to note why the IRS should subordinate your lien. Here are the two choices:

• The subordination will allow you to pay your tax debt in full. 
• The subordination will help make tax collection easier for the IRS. 

The latter option typically applies when you are requesting lien subordination so that you can make larger monthly payments to the IRS. You may also need to attach a statement explaining how subordinating the lien will make it easier for the IRS to collect the taxes owed. 

Form 14134 Instructions

The potentially confusing aspect of this form is that it’s not just designed for taxpayers to use. Lenders, tax attorneys, and others may use this form to request lien subordination. Here are the instructions.

Form 14134 requests taxpayer information in the first section. The second section is information about the applicant. If you’re filling out this form, you should just tick that the applicant is also the taxpayer. In contrast, if a lender were filling out this form, they would put their information in the applicant section. 

Section three is for details about the property owner. The fourth section is for tax attorney info if applicable. Section five requests details about the lending company and the type of loan, while section six asks for details about the amount of the loan. Then, you provide a description of the property and its address if you’re dealing with real estate. 

You also need to attach the following documents when you file Form 14134:

• Appraisal or valuation of the property.
• Copy of the federal tax lien — You only need to attach the lien if someone else is applying on your behalf. If you apply, you don’t have to provide a copy of the lien.
• Copy of the proposed lien subordination agreement. 
• Copy of the current title report and a list of encumbrances that take seniority over the federal tax lien. 
• Copy of the proposed loan closing statement. 

Alternatives to Lien Subordination

Federal tax lien subordination is not your only option. Rather than convincing the IRS to subordinate its lien, you may want to explore the following:

• Set up a payment plan — Generally, an IRS tax lien remains in place when you set up a payment plan, but the IRS will stop other collection actions against you. However, in some cases, you can convince the agency to withdraw its lien once you set up a payment plan. If that’s not possible, you can ask the agency to release the lien from certain assets.
• Apply for an offer in compromise — An offer in compromise lets you settle your tax debt for less than you owe, and if you get one approved, the IRS will withdraw the tax lien. Note, however, that it can be hard to get an offer approved if you have equity in assets.
• Contest the lien — If the lien has been issued in error or if it’s attached to assets that aren’t really yours, you can request a lien withdrawal.
• Pay the tax in full — The IRS must withdraw the lien if you pay the tax debt in full. If you have an open credit card or family who is willing to loan you money, you may want to explore those options.
• Request a discharge of property — Rather than requesting lien subordination, you can request to discharge property. This allows you to sell your property as long as you use the proceeds to pay your tax debt.

These are just some of the options. When you contact us, we will help you find the best option for your situation.

FAQs About Tax Lien Subordination

What is federal tax lien priority?

This is the priority your federal tax lien takes in relation to other liens. Generally, IRS tax liens fall in line behind existing liens. New liens typically take priority after the federal tax lien. If the IRS agrees to subordination, its lien will take priority behind another lien.

Can you get a home equity loan if you have a tax lien? 

Generally, you won’t be able to get a home equity loan if you have a tax lien. However, if the IRS agrees to subordinate its lien to the home equity lender, you may be able to get a home equity loan as long as you meet the other qualification criteria. 

Does subordination remove your federal tax lien?

No, subordination does not remove your federal tax lien. It just gives the tax lien a lower priority than other lien holders. Lien withdrawal is the process of removing your lien from the public record.

Get Help With Lien Subordination

Need help applying for lien subordination? Looking for other ways to get the lien released? Wondering if this is the best option for taking care of your unpaid taxes? Then, contact us today.

At the W Tax Group, our tax attorneys have extensive experience helping people deal with income, business, and estate tax liens. We work closely with all of our clients to provide them with the individualized attention they need to resolve their tax problems. Don’t wait — contact us for a free consultation today.

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg