What is a Certificate of Subordination of Federal Tax Lien?

Understanding Federal Tax Liens and How Subordination Works

When you owe unpaid federal taxes, the IRS may file a federal tax lien against your property, which establishes a legal claim on your assets to secure the government’s debt. This lien applies to all your property rights, including real estate, making it difficult to borrow money because lenders see the IRS as having the first right to be paid if the property is sold.

A Certificate of Subordination allows the IRS to temporarily lower the priority of their lien, letting a new lender’s mortgage or loan take precedence. This means the new lender gets paid before the IRS if the property is sold, making lenders more willing to offer financing. It is a strategic tool for taxpayers seeking refinancing, home equity loans, or other credit while resolving outstanding taxes.

The Subordination Process

1. Federal Tax Lien Filed: The IRS files a lien after unpaid taxes are assessed.
2. Loan Request: You seek a new loan or refinancing.
3. Lender’s Request: The lender asks for the IRS to subordinate its lien.
4. Application Submission: You file IRS Form 14135 (Application for Certificate of Subordination of Federal Tax Lien).
5. IRS Review: The IRS evaluates your tax compliance, payment history, and property equity.
6. Certificate Issued: If approved, the IRS issues the Certificate of Subordination.
7. Loan Closure: The lender finalizes the loan with priority over the IRS lien.

Subordination is discretionary, meaning the IRS decides case-by-case based on established criteria including payment plans, property value, and loan type.

Real-Life Examples

• Mortgage Refinancing: Jane owes back taxes with an IRS lien on her home. To refinance and secure better mortgage rates, she applies for and obtains a Certificate of Subordination, allowing the new lender to become the first lienholder.

• Home Equity Loan: Mike needs funds for college and applies for a home equity loan. The IRS subordinates its lien, enabling the lender to approve the loan despite existing tax debts.

Eligibility Criteria

The IRS considers:

• Your current tax payment status and any installment agreements.
• The equity available in your property.
• The purpose and nature of the new financing.
• Your overall cooperation and compliance with tax requirements.

Successful applicants typically demonstrate that the new loan poses minimal risk to IRS collection efforts.

Tips for a Successful Application

• Maintain current tax payments or active installment agreements.
• Provide thorough documentation of property value and loan details.
• Collaborate closely with your lender who may assist with the IRS process.
• Apply well before closing deadlines due to IRS review times.
• Explore alternatives like payment plans or offers in compromise if subordination is denied.

Common Misconceptions

• Does not remove the lien: It only changes lien priority.
• Not a guarantee: IRS approval is subject to strict review.
• Does not cancel debt: Taxes owed remain until fully paid.
• Not universal: Only certain loans and lenders qualify.

Frequently Asked Questions

How long does a Certificate of Subordination last? Generally, it remains until the subordinated loan is paid or refinanced.

Is there a fee? The IRS does not charge a fee, but you may incur costs for professional help.

Can I apply if I’m behind on payments? It’s more challenging but possible with cooperative payment arrangements.

Comparing IRS Tax Lien Certificates

For more detailed guidance, see the IRS Form 14135 instructions at irs.gov and learn about federal tax liens on IRS.gov.

Additionally, explore related concepts like IRS Tax Liens and Mortgage Refinancing on FinHelp for comprehensive financial planning insights.