Outstanding IRS liabilities can create many issues for taxpayers. To pay all or part of a liability, taxpayers may be required to seek a loan using personal or real property as security. However, this process can be complicated by the filing of a lien on the property by the IRS.
Fortunately, § 6325(d) of the Internal Revenue Code permits the “subordination” of federal tax liens (i.e., the placement of liens behind other loans in terms of priority). The IRS has procedures in place for taxpayers to request subordination, which are discussed briefly below.
Publication 784
IRS Publication 784 discusses the procedure for applying for a “certificate of subordination” of a federal tax lien. The publication generally provides that the taxpayer must complete and submit IRS Form 14134, and the IRS will review and make a determination as to whether to grant the certificate. Granting the certificate is entirely within the IRS’s discretion.
Form 14134
IRS Form 14134 is a somewhat lengthy form, and requests a variety of information, including information regarding the taxpayer, the lender, certain monetary information, and information related to the loan being sought.
This form also requires the taxpayer to identify the “basis” for which the subordination is being requested. The I.R.C. sets forth two different bases for subordination of a standard federal tax lien, both of which are described in § 6325(d).
- 6325(d)(1)
Under I.R.C. § 6325(d)(1), taxpayers may request subordination of a federal tax lien on the basis that they will be paying an amount equal to the lien, or the interest to which the certificate subordinates the lien, to the IRS. [1] This language appears complicated but essentially means that the taxpayer will pay over either (i) the entire amount of the IRS lien, or (ii) the net amount received on the new loan. Publication 784 provides the following example:
- A taxpayer has an existing loan on a $200,000 property with an outstanding balance of $145,000;
- The taxpayer seeks to refinance the loan to an outstanding balance of $160,000; and
- The refinance would include closing costs of 3% of the refinanced amount. [2]
Under this example, the taxpayer would receive $160,000 from the lender, but would be required to pay (i) $145,000 to pay off the original loan, and (ii) $4,800 in closing costs ($160,000 * 3%). This would result in net proceeds of $10,200, which would be due to the IRS.
This basis also requires making a payment to the IRS, but not at the time of the application. Once the application is submitted to the IRS, the IRS Advisory Group Manager will make a determination as to the amount of the payment and will notify the taxpayer. If the certificate of subordination is granted on this basis, it will be issued upon the IRS’s receipt of its “interest” in the loan. [3]
- 6325(d)(2)
Under I.R.C. § 6325(d)(2), taxpayers may also request subordination on the basis that the issuance of the certificate will increase the amount of money the IRS will realize, and will make collection of the tax liability easier. [4] As an example, the IRS may agree to subordinate its tax lien to enable the taxpayer to refinance an existing loan to achieve a lower monthly payment. The lower monthly payment, in turn, will enable the taxpayer to increase payments to the IRS.
Unlike the §6325(d)(1), this basis does not require any payments to the IRS. If the certificate of subordination is granted on this basis, it will be issued when the IRS has completed its review and investigation of the taxpayer’s application and other information. [5]
[1] I.R.C. § 6325(d)(1).
[2] IRS Pub. 784.
[3] Id.
[4] I.R.C. § 6325(d)(2).
[5] IRS Pub. 784.
