Tax Lien Subordination

In today’s economy, many taxpayers have requested loan modifications or refinanced their mortgages to pay off other debt or just reduce their housing payments.  Taxpayers with significant tax liabilities may have tax liens, which silently attach to their property.  These taxpayers, who are looking to modify their existing loans, may face challenges with the process as the mortgage company discovers the tax lien on their credit report and does not want to come behind the IRS when it comes to being repaid. In circumstances like these, a taxpayer may be able to request that the IRS subordinate the tax lien.  Subordination does not remove the lien but allows other creditors to take priority over the IRS tax debt and makes it easier for the taxpayer to get a new loan/mortgage.

Pursuant to IRC 6325(d)(1) or 6325(d)(2), the IRS grants subordinations if certain criteria is satisfied. First, the IRS will grant the subordination of the lien so that a taxpayer can refinance if the IRS receives an amount equal to the lien or an interest resulting from the payment of the refinanced loan after closing costs. Second, the IRS may subordinate the loan if they determine that this will enhance the taxpayer’s collection potential to the government and the taxpayer can pay more monthly payments towards their past tax debt.

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