What Is Subordination of a Federal Tax Lien?

Jill Bridges
Expert Contributor
Last Updated:
At Solvable, we care about your financial well-being and are here to help. Our research, articles and ratings, and assessments are based on strict editorial integrity. Our company gets compensated by partners who appear on our website. Here is how we get compensated
  • Subordination is one solution for dealing with a federal tax lien.
  • With subordination, the IRS lowers its priority on your property, which can let you get a new loan so that you can pay your debt.
  • Subordination does not remove a federal tax lien, but it may give you the ability to pay your debt.

If you’ve been in debt to the Internal Revenue Service for quite some time and haven’t made any effort to pay your back taxes, the agency has several methods it can use to get what it’s owed, including placing a tax lien on your property. When the IRS places a tax lien, they are staking a claim against your property in order to recover your back taxes. If you don’t clear your debt in a certain amount of time, your property, such as your home or bank account, can be seized.

Tax liens can be a very complicated issue, particularly if the IRS isn’t the only entity to which you’re in debt. If the IRS places a lien on your property, there is a process known as subordination that will give other creditors a higher claim to your property than the IRS. Here are a few things you need to know about subordination of a federal tax lien so that you’re prepared for this process.

The Meaning of Subordination

One of the important things to understand about debt is that it’s possible for multiple creditors to have an interest in your property. For instance, if you purchased your home using a mortgage, then the mortgage company would have an interest in your property. When the IRS places a lien against your home, they also have an interest in your property. As you might imagine, when multiple creditors have an interest in your property, paying them all can get a bit tricky.

When multiple entities have an interest in your property, their priority is based on a principle called “first in time, first in right.” Basically, this means that the first debt to exist is the one that takes priority. If you have a mortgage on your home and then the IRS places a lien, the mortgage company would have first priority to foreclose on your home and be paid from the proceeds.

This idea of first in time, first in right can make dealing with a tax lien very difficult, especially if you’re interested in refinancing your mortgage to help you pay your tax debt. Lower priority creditors will be very reluctant to help you refinance because new creditors will have to wait for payment until the lien is paid. This is where subordination comes into play.

What Is Subordination of a Federal Tax Lien?

Subordination of a federal tax lien means that the IRS is giving up its priority on your property, which can make it easier for you to refinance your mortgage. While it won’t clear your lien, subordination may make it possible for you to pay your back taxes so that you can have the lien discharged.

See More >> This Guy Resolved His $8,597 Tax Debt - Learn His Methods!

Subordination Can Help You Get a New Loan

Since subordination won’t actually remove your tax lien, you might be wondering if there’s even any point in requesting that the IRS give up their priority to your property. Subordination may make it easier for you to pay off your debt so that your lien can eventually be discharged.

With a lien in place, it can be almost impossible to get any credit since new creditors will automatically be below the IRS in priority. After subordination of a lien, you may be able to get a new loan, which you can then use to pay off your tax debt.

The Process of Subordination

Once the IRS has placed a lien against your property, they aren’t going to give up their priority unless you can give them something in exchange. After all, the entire point of a tax lien is to recover tax debt, so the IRS won’t do anything that would put their ability to collect this debt at risk.

If the IRS stands to lose money from subordinating your lien, offering the agency the amount they stand to lose is one way to get them to give up their priority. For instance, if your current mortgage is $200,000 and you want to refinance for $230,000, you could give the IRS the $30,000 that they would lose by lowering the lien priority.

Solvable Exclusive Offer

How Much Tax Debt Do You Owe?

 Recommended

Demonstrating that subordination will improve your financial situation and allow you to pay your tax debt is another way you may be able to convince the IRS to give up their priority. If you’re able to refinance your mortgage at a lower interest rate, for example, this could allow you to make larger installment plan payments to the IRS.

If the IRS agrees to subordinate your tax lien, they will provide you with a Certificate of Subordination. Usually, you would need to present this document to a junior creditor before they will agree to refinance your mortgage.

See More >> How One Woman Crushed $300,000+ of Student Loan & Mortgage Debt

You should keep in mind that subordination does not remove your tax lien. The lien will remain in place until your debt is paid, and the IRS will maintain their priority on any other property they have put a lien on.

Other Ways of Dealing With Your Tax Lien

Besides subordination, you have a few other options to consider:

  • Discharge of Property
  • Withdrawal

A discharge of property means you are requesting that the IRS remove a lien so you can sell a piece of property to cover your tax debts.

The IRS may also agree to withdraw your lien if you have made arrangements to pay off your back taxes. Generally, requesting an installment agreement from the IRS is the best way to have a lien withdrawn.

If you’ve entered into an installment agreement and want to request a lien withdrawal, you must meet the following requirements:

  • You owe less than $25,000.
  • You are a qualifying taxpayer.
  • Your debt will be paid within 60 months or before the statute of limitation expires.
  • You haven’t defaulted on a previous installment agreement or your current agreement.
  • You’ve complied with other filing and payment requirements.

The best way to avoid a tax lien is getting out of tax debt as soon as possible, which is where Solvable can help you. We offer reviews of debt relief companies so that you can make an informed decision about which company can best help you get out of debt once and for all.

See More >> Trustworthy Tax Relief Companies + Customer Reviews

 

Next Steps:

Jill Bridges
Expert Contributor
Last Updated: