Understanding Federal Tax Liens
A federal tax lien is a legal claim by the IRS against your property when you fail to pay your tax debt. This lien attaches to assets like homes, vehicles, or other property and gives the IRS a secured interest to get paid before other creditors. Because the IRS lien usually has priority over other claims, it can complicate selling or refinancing property until the tax debt is resolved.
What Is Subordination of a Federal Tax Lien?
Subordination is an agreement by the IRS to allow a new lien (typically from a mortgage lender) to take precedence over the existing federal tax lien. Essentially, the IRS agrees to move its lien lower in priority, so the new creditor’s lien becomes the primary claim on the property. This does not erase or reduce your tax debt but improves your ability to get financing or refinance existing loans.
How Does the Subordination Process Work?
- Loan Application and Request: The new lender identifies the existing federal tax lien and requests the IRS to subordinate it.
- IRS Review: The IRS assesses your compliance with tax payments, current payment plans, and the terms of the proposed loan.
- Decision and Filing: If the IRS approves, it files a subordination agreement with the local recorder’s office, legally establishing the new lien’s priority over the IRS lien.
- Impact: The new loan is recorded as senior, allowing for refinancing or purchase financing to proceed.
Who Can Benefit from Subordinating a Federal Tax Lien?
- Homeowners seeking to refinance mortgages despite existing IRS liens.
- Buyers obtaining a mortgage on property with federal tax liens.
- Business owners using real estate as collateral for new loans.
- Anyone needing credit access hindered by IRS lien priority.
Important Considerations
- IRS subordination requires that you be current on tax payments or enrolled in a compliant installment agreement.
- Subordination only changes the lien’s priority; it does not reduce or forgive tax debt.
- The IRS evaluates whether subordination jeopardizes its ability to collect taxes before approval.
- The process can take several weeks, so plan accordingly when applying for new loans.
Common Misconceptions
- Subordination removes the IRS lien: False. The lien remains until paid or released.
- Anyone with a lien can get subordination: False. The IRS applies strict criteria and may deny requests.
- Subordination clears your credit report: No. The lien will continue to appear until resolved.
Example Scenario
Sarah has a $10,000 IRS federal tax lien on her home due to unpaid taxes. She wants to refinance her mortgage to reduce monthly payments but faces rejection because the IRS lien has top priority. Her new lender requests subordination, the IRS approves after verifying her payment plan, and the lender’s mortgage lien becomes senior. This enables Sarah to refinance her mortgage without paying off the tax debt immediately.
Tips for Handling Federal Tax Liens and Subordination
- Stay current on your tax payments or maintain an installment agreement.
- Communicate with your lender early to initiate subordination requests.
- Consult a tax professional or financial advisor for guidance tailored to your situation.
FAQs
How long does IRS lien subordination take? Typically, it takes several weeks, depending on IRS workload and documentation submitted.
Does subordination mean the tax debt must be paid off? No, but you must be in good standing with your payment plan.
Can the IRS deny a subordination request? Yes, especially if the IRS believes the new loan reduces its chances of full tax collection.
Summary
Subordinating a federal tax lien shifts the order of priority so new lenders can place liens ahead of the IRS. This facilitates refinancing or purchasing property when a federal tax lien exists. However, it does not remove or reduce the tax debt owed. Understanding the process and requirements can help you navigate financing challenges caused by IRS liens.
For more detailed information, visit the official IRS Tax Lien Subordination page or check out consumer resources on tax liens at ConsumerFinance.gov.