A federal tax lien is the government’s legal claim against your property when you have unpaid taxes. This lien secures the IRS’s interest by giving it a priority claim on your assets, meaning the IRS gets paid before other creditors if your property is sold or refinanced. However, this priority can make lenders reluctant to offer new financing or refinance your existing loans because the IRS’s claim takes precedence.
Requesting a subordination of a federal tax lien is a formal process where you ask the IRS to allow a new lender to have priority over their lien. The lien remains in place, but the IRS agrees to “step back” behind the new lender in the order of payment. This improves your chances of securing a loan or refinancing, often with better terms.
How Subordination Works
The IRS uses subordination to help taxpayers manage their debts more flexibly without removing the lien. For example, if you want to refinance a mortgage or get a home equity loan, lenders may require the IRS lien to be subordinated so they have a first claim on your property.
This process:
- Begins with the IRS filing a Notice of Federal Tax Lien on your property, establishing their priority.
- Occurs when you want to refinance or obtain a new loan but face lender resistance due to the lien.
- Involves submitting Form 14134, “Application for Certificate of Subordination of Federal Tax Lien,” along with supporting documents.
- Leads to IRS review of your tax status, payment history, and the purpose of the new loan.
- Results in either an approval or denial of the subordination request.
Eligibility and Requirements
To qualify for subordination, you typically need to:
- Be current with your tax payments or have an IRS payment agreement in place.
- Show that the new loan will increase the value of your property, improve your ability to pay your tax debt, or benefit your financial situation.
- Provide complete and accurate documentation, including details about the proposed loan.
Practical Example
Suppose you owe $20,000 in back taxes and have a federal tax lien on your home. You want to refinance your mortgage to lower monthly payments. Without subordination, your bank may refuse loan approval because the IRS lien has priority. After you request and receive a subordination, your lender gains first repayment rights over the IRS if you default, which reassures them to approve the refinancing.
Common Mistakes to Avoid
- Assuming subordination removes the tax lien (it does not).
- Falling behind on IRS payments, which can disqualify you.
- Submitting incomplete or inaccurate Form 14134 applications.
Frequently Asked Questions
Q: Will requesting subordination reduce my tax debt?
A: No. Subordination only changes lien priority; your debt to the IRS remains.
Q: How long does the IRS take to process a subordination request?
A: Decisions generally take 4 to 8 weeks, depending on case complexity.
Q: Does subordination apply only to real estate?
A: It most commonly applies to real property but can affect other lienable assets.
Q: Does subordination impact my credit score?
A: The lien itself may affect credit, but subordination changes creditor priority without directly impacting your score.
Tips for a Successful Request
- Stay current on tax obligations or maintain an IRS payment plan.
- Complete Form 14134 carefully with supporting evidence.
- Clearly explain how the new financing benefits your property or ability to pay taxes.
- Allow time for IRS processing and seek professional advice if needed.
For more details on federal tax liens and the implications of lien priority, see our articles on Federal Tax Lien and Tax Lien Subordination.
Official IRS resources, including Form 14134 and instructions, can be found on the IRS website, providing authoritative guidance for applicants.
Requesting a subordination is a valuable tool to access financing options despite owing taxes, helping to improve your financial flexibility while still meeting IRS obligations.