The Discharge and Subordination of IRS Liens

September 29, 2020

By Daniel J. Gibson

So you’ve just found out that the IRS has filed a lien on all your assets. That’s not exactly what you wanted to hear. However, after you take a deep breath, you realize that you do have a significant balance due to the IRS and have left them no other choice.

Feeling overwhelmed, you resolve to play defense and see what the IRS’ next move is. If you have equity in your assets, fortunately there are two viable moves: discharging assets from a tax lien or subordinating a tax lien.

Discharging Assets from a Tax Lien

A tax lien lays like a blanket over all of your assets. This includes assets owned at the time of the lien filing as well any future asset purchases. The purpose of the lien is to protect the government’s interest in what it is owed by you. However, the IRS really doesn’t want your vacation home, they want the money. The IRS is more than happy to allow a sale to proceed. The lien blanket would remain in place while the IRS allows you to remove that asset from beneath the blanket and provide a clear title for the buyer. The goal for the IRS is to ensure that it receives whatever equity would otherwise have gone to you, limited to what it is owed.

In order to effectuate this transaction, you will need to include IRS Form 14135 (Application for Certificate of Discharge of Property from Federal Tax Lien), contract of sale, appraisal and HUD statement.

Subordinating a Tax Lien

What if you want to refinance your property? Similarly, if this allows you to pay off your tax debt or increase monthly payments to the IRS, this should convince it, in most cases, that taking a subordinate position and allowing a lender to “jump the line” is in the IRS’ best interest.

You will need to complete and submit IRS Form 14134 (Application for Certificate of

Subordination of Federal Tax Lien) and a document package to support the contention that the loan improves collection, such as appraisals, loan documents, payout and/or the new monthly payment.

Click here to learn more or register for our October 20 “Liens and Levies” webcast.

About Daniel Gibson

Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.