When you neglect to pay your federal income taxes, the IRS can file a Notice of Federal Tax Lien (NFTL) with the local and/or state authorities. An NFTL is a public record, and it can adversely affect your ability to take out new loans or refinance existing ones. With tax lien subordination, however, you may be able to increase your chances of approval.
What is Tax Lien Subordination?
When the IRS places a lien on your property, it’s essentially letting everyone know they have priority over all other creditors. With tax lien subordination, however, you can temporarily move the IRS tax lien to a lower priority. This could allow you to obtain new financing or refinance your existing mortgage. This process is crucial when you need to access equity in your property or secure a new loan. Most lenders will not approve financing if there is an outstanding tax lien taking precedence over their interests.
By subordinating the tax lien, the IRS agrees to temporarily place its claim behind the new lender’s interest. This allows you to proceed with the desired financial transaction. It’s important to note that the tax lien is not removed or forgiven. It simply takes a temporary backseat to the new lender’s interests.
Reasons Why You May Want to Request Subordination
There are a variety of reasons why you may want to consider tax lien subordination, such as:
- Access to Equity. If you have equity built up in your property but are unable to access it due to an existing tax lien, subordination can unlock that equity. This allows you to refinance or obtain a home equity loan.
- Financing Opportunities. When you’re trying to secure a new mortgage or refinance an existing one, lenders will typically require the tax lien to be subordinated. They want their interests to take priority over any other outstanding tax debt.
- Property Transactions. If you’re planning to sell your property, subordinating the tax lien can facilitate a smooth transaction by ensuring that the new buyer’s interests are protected.
- Financial Flexibility. By gaining access to financing options, you can potentially resolve your tax debt more effectively. You’ll have the freedom to negotiate payment plans or explore alternative solutions.
If any of these situations apply to you, consider submitting a request for tax lien subordination as soon as possible.
How to Apply For Tax Lien Subordination
The process of applying for tax lien subordination involves several steps. Here’s a general overview:
- Gather Necessary Documentation. You’ll need to provide the IRS with various documents, including proof of ownership, a copy of the proposed loan or refinancing agreement, and a detailed explanation of your financial situation and the reasons for seeking subordination.
- Complete IRS Form 14134. This form, titled “Application for Subordination of Federal Tax Lien,” is the primary document you’ll need to submit to the IRS. It requires detailed information about the property, the proposed financing, and your tax debt.
- Submit the Application. Once you’ve completed the form and gathered all the necessary documents, you’ll need to mail the form and the appropriate attachments to: IRS Advisory Consolidated Receipts, 7940 Kentucky Drive, Stop 2850F, Florence, KY 41042. If you have any questions, call the office at 859-594-6090 before mailing your packet.
- Await IRS Review. The IRS will review your application and supporting documentation to determine if subordination is appropriate based on your specific circumstances and the potential for the IRS to collect the outstanding tax debt.
- Receive IRS Decision. If approved, the IRS will send a conditional commitment letter, followed by a Certificate of Subordination. If denied, you may have the option to appeal the decision (Form 9423, Collection Appeal Request) or explore alternative solutions.
It’s important to note that the IRS has specific criteria for evaluating subordination requests. The process can take several weeks or even months, depending on the complexity of your case.
Common Misconceptions About Tax Lien Subordination
As with any complex financial process, there are several misconceptions surrounding tax lien subordination.
- Subordination removes the tax lien entirely.
Reality – Tax lien subordination does not remove the lien; it merely temporarily moves the IRS’s claim to a lower priority. This allows you to secure new financing or refinance an existing loan.
- Subordination is automatically granted.
Reality – The IRS carefully evaluates each subordination request based on specific criteria. Approval is not guaranteed.
- Subordination resolves the tax debt.
Reality – Subordination does not eliminate or reduce your outstanding tax debt. It simply facilitates access to financing options that may help you resolve the debt more effectively.
- Subordination is a one-time process.
Reality – You may need to apply for subordination multiple times if you plan to refinance or obtain new financing in the future. The subordination agreement is typically tied to a specific loan or transaction.
Working With a Tax Professional
Although it is possible to navigate the tax lien subordination process on your own, working with a qualified tax professional can offer numerous benefits. Here are some reasons why you may want to consider seeking professional assistance.
- Expertise and Experience: Tax professionals, such as CPAs or enrolled agents, have extensive knowledge and experience in dealing with tax matters, including tax lien subordination. They can provide valuable guidance and increase your chances of a successful outcome.
- Representation and Negotiation: Tax professionals can represent you before the IRS and negotiate on your behalf. This ensures your rights are protected and that the best possible outcome is achieved.
- Compliance and Documentation: Navigating the complex paperwork and documentation required for tax lien subordination can be daunting. Tax professionals ensure that all forms are completed accurately and that all necessary supporting documents are provided.
- Strategic Planning: Tax professionals can help you develop a comprehensive strategy for managing your tax debt, exploring various options, and determining the most appropriate course of action based on your unique circumstances.
- Peace of Mind: Working with a tax professional can provide you with peace of mind. You’ll know that your case is being handled by an experienced professional who has your best interests at heart.
While seeking professional assistance may involve additional costs, the potential benefits of a successful tax lien subordination or resolution of your tax debt can often outweigh the upfront expenses.
Final Thoughts
Tax lien subordination is a crucial process for property owners facing outstanding tax debts. By temporarily moving the IRS’s claim to a lower priority, you can unlock access to financing options, preserve your equity, and potentially resolve your tax debt more effectively. However, the process can be complex. It’s essential to understand the intricacies involved, as well as the potential alternatives and strategies for removing a tax lien altogether.
Seeking the guidance of a qualified tax professional can be invaluable in navigating the tax lien subordination process. It ensures compliance with IRS regulations and maximizes your chances of a successful outcome. Remember, proactive action and careful planning are key to protecting your property rights and achieving financial stability.
If you’re a property owner facing tax debt and considering tax lien subordination, don’t hesitate to reach out to our team of experienced tax professionals. Contact Tax Defense Network today at 855-476-6920 to schedule your free initial consultation and take the first step toward resolving your tax lien challenges.