Subordination of IRS tax lien to other encumbrance
- Collection Options:
- extension up to 120 days to pay taxes in full
- currently not collectible (hardship) status – delay collection until financial condition improves
- installment payments
- expiration of Statute of limitations
- offer in compromise – settle for less than full payment
- See also: collection standards
- financial Information forms
- collection due process hearing right
- IRS Taxpayer Advocate Service (TAS)
- IRS Form 911 – Request for Taxpayer Advocate Service Assistance/ hardship relief
- Low Income Taxpayer Clinic (LITC)
- determining the correct tax
- audits / record keeping
- IRS correspondence audits
- notice of deficiency
- Tax Court
- what if you haven't filed returns
- trust fund recovery penalty
- what if you can't pay your taxes
- what if my spouse owes taxes but I don't
- can I really settle for pennies on the dollar ?
- innocent spouse relief
- injured spouse relief
- tax liens & levies
- subordination of lien
- can the IRS take my house
- abatement of penalties
- discharge of property from lien
- subordination of IRS lien, e.g., to refinancing
- bankruptcy doesn't remove a tax lien even after the tax is discharged
- trust fund recovery (responsible person) penalty
- private party (non-IRS) debt collectors
- tenancy by the entirety protections US v. Craft
When you owe taxes, a general tax lien automatically applies to "all your property or interest in property". The tax lien does not name specific property such as the legal description in the deed of trust on your residence. It includes property not legally titled in your name such as a contract for deed.
It is not an "enforced" collection action to immediately take your property, but impedes your ability to deal with your property, e.g., selling or refinancing your residence, because the lender's security interest is inferior to the IRS lien and a purchaser takes the property subject to the tax lien. The lender or buyer is not personally liable for the tax, but the IRS can seize and sell the property and the tax liability gets paid first before the lender receives payment on its loan, or the buyer receives any money for its lost property. Consequently, lenders will not complete a refinance and buyers will not purchase the property unless the tax issues are resolved.
If you want to refinance your residence but are not able to pay the tax in full, the IRS may agree to subordinate the IRS lien to a lender's security interest to permit the refinance where it deems it "in the best interest of the government". Subordinating the IRS lien makes the lender's security interest superior or prior to the tax lien (in "first position"). The lien remains in place and continues to encumber the property (inferior to the refinanced debt) and your other property. The refinancing could be in the government's best interest because the IRS receives funds from the refinancing (you borrow more than needed to pay off the prior loan), or the interest rate is lower resulting in lower loan payments so you can make larger installment payments.
Sale of our property will require the tax to be paid and the lien released or the property discharged from the lien.
You must request the IRS subordinate its lien and provide information as of the value of the property, existing debt, and the new lender and loan. To apply for the subordination you must provide the following information:
- The legal description of the property.
- A copy of the contract for sale of the property.
- A copy of the tax lien.
- Information regarding the priority lien holder (your current lender), including name, recording information and date of the deed of trust, monthly payment, interest rate, original loan balance and current loan balance.
- A draft closing statement showing the costs, commissions and expenses in connection with the same, and amount that would otherwise be paid to you and your wife from the refinancing of the property.
- Two appraisals of the property, one of which would be the lender's appraisal for obtaining the loan, and the second could be a letter of appraisal from a realtor familiar with property in the area setting forth their estimate of the appropriate sales price of the
- The closing date and location for the sale of the property.
To apply for a certificate of lien subordination, people must follow directions in Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information. 12/17/08