The IRS, as a collection authority, is very serious about tax-related issues and employs various measures to collect owed money, with tax liens being the most common. Given the financial burden a tax lien can impose, there are ways to manage it effectively. One such option is IRS tax lien subordination, which allows you to secure a loan or refinance your mortgage despite the lien, enhancing your financial capability. Wondering if lien subordination is the right option for you? You can consult with an experienced IRS tax attorney at the Law Offices of Nick Nemeth. In this blog, we will delve deep into IRS tax lien subordination to help you determine if it’s the best option for your circumstances.
Understanding IRS Tax Lien Subordination
An IRS tax lien is a legal claim by the government on your assets to secure payment of unpaid taxes, and it can significantly impact your financial life. Tax lien subordination is a process where the IRS temporarily moves its position in the priority of creditors. This means that other creditors, such as a mortgage lender, can take precedence over the IRS for a specific property or asset. Subordination does not remove the lien but allows for improved financial flexibility, such as securing loans or refinancing a mortgage, despite the existing tax lien.
How Does IRS Tax Lien Subordination Work?
Subordination doesn’t eliminate the tax debt; it merely rearranges the order in which creditors can claim assets. Typically, in the case of a lien, the IRS is the first to claim authority. However, when subordination is granted, other creditors can take precedence over the IRS. This increases the taxpayer’s chances of obtaining a loan and paying off their tax debt. The IRS will agree to subordinate its lien under section (IRC) 6325(d)(1) or 6325(d)(2). These sections have specific requirements for tax lien subordination:
- IRC 6325(d)(1): The IRS may agree to subordinate the tax lien if you consent to pay an amount that matches the interest being subordinated.
- IRC 6325(d)(2): The IRS may subordinate its interest if doing so will increase the overall amount they can collect.
Selecting the right section can be challenging, as the IRS may not approve your preferred option. In this case, our IRS tax attorney in Frisco can help. They will assess your existing debt, the potential amount realized after refinancing, and the IRS’s interests to determine the most suitable section for your situation. This tailored approach can increase your chances of approval.
Benefits of IRS Tax Lien Subordination
- Improved Financial Flexibility: Subordination can facilitate refinancing, securing loans, or selling property, offering much-needed financial relief.
- Potential Increase in Property Value: In some cases, refinancing or making home improvements can enhance property value, which may ultimately benefit the IRS when it collects its debt.
- Avoiding Foreclosure: By allowing you to refinance your mortgage and bring your payments up to date, subordination can help prevent foreclosure.
Eligibility Criteria for IRS Tax Lien Subordination
Meeting the eligibility criteria for IRS tax lien subordination is essential. The IRS is more likely to agree to subordination if:
- A Solid Plan to Pay Off the Tax Debt Exists: This could involve utilizing funds from a loan or refinancing to make installment payments on the tax debt.
- Subordination is Likely to Increase the IRS’s Recovery: For instance, if refinancing results in a lower interest rate, it may enable the allocation of more funds toward the tax debt, ultimately benefiting the IRS.
- Financial Hardship Can Be Demonstrated: If the tax lien is causing significant financial difficulties, the IRS may be more inclined to grant subordination to alleviate the financial burden.
Common Situations for Considering Lien Subordination
Tax lien subordination is often considered in the following situations:
- Refinancing a Mortgage: If refinancing is necessary to avoid foreclosure or secure a lower interest rate, subordination can be beneficial.
- Selling a Property: To facilitate the sale of a property, the IRS may agree to subordinate its lien.
- Obtaining a Home Equity Loan: If funds are needed for home improvements or other purposes, subordination can enable the acquisition of a home equity loan.
Comparing IRS Tax Lien Subordination to Other Options
While subordination can be a viable solution, it’s essential to consider it alongside other options:
- IRS Tax Lien Removal: Ideal if you can pay off your tax debt in full. This option eliminates the lien entirely.
- IRS Lien Withdrawal: Suitable if the lien was filed in error or if withdrawing it will facilitate tax debt repayment.
- Federal Tax Lien Release: Occurs when the debt is paid off or becomes unenforceable due to time limitations.
Each option has its own advantages and limitations. Evaluating your financial situation and goals is necessary to choose the right option. At the Law Offices of Nick Nemeth, our experienced attorney can help determine the best course of action based on your case.
The Application Process for IRS Tax Lien Subordination
Applying for IRS tax lien subordination involves several key steps:
- Complete Form 14134: This is the application form for the Certificate of Subordination of Federal Tax Lien.
- Gather Documentation: Collect all necessary documents, such as the mortgage agreement, loan application, and any other supporting materials.
- Submit the Application: Send the completed form and documentation to the appropriate IRS office for review.
- Await Approval: The IRS will review the application and determine if subordination is advantageous for them.
It is essential to work with a tax professional to prepare a strong application and improve the chances of approval.
Potential Challenges and Pitfalls
While IRS tax lien subordination can offer significant benefits, it also presents potential challenges:
- Approval Time: The process can be time-consuming, and approval is not guaranteed. It may take several weeks or months to receive a decision from the IRS.
- Strict Criteria: Meeting all the eligibility requirements for subordination can be difficult. The IRS has specific criteria that must be met, which can vary based on individual circumstances.
- Ongoing Compliance: Maintaining compliance with all tax obligations is essential during and after the subordination process. Failure to meet these obligations could affect the subordination agreement and lead to further complications.
Consulting a Tax Professional
Given the complexity of IRS tax lien subordination, seeking advice from a tax professional is crucial. If you need assistance with a tax lien in Frisco, the Law Offices of Nick Nemeth is ready to help. Our experienced tax lien lawyer or IRS tax attorney can provide expert guidance, evaluate your options, and represent your interests with the IRS. We will assist you throughout the application process, ensure compliance, and work to increase your chances of approval. To learn more about tax lien subordination and explore your options, schedule a consultation with our tax attorney in Frisco. Contact us at (469) 200-4704 or email info@myirsteam.com to get started.
