A federal tax lien on real or personal property may be terminated or altered in the following ways:
- The IRS must release a tax lien if the IRS determines that the tax liability has been paid or is legally unenforceable.
- The IRS has discretion to discharge specific property from a tax lien in certain circumstances.
- The IRS may withdraw a notice of federal tax lien even though the lien has not been paid or satisfied, in certain circumstances.
- The IRS may subordinate tax liens in certain circumstances.
- The IRS may issue a certificate of non-attachment.
In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution’s lien. This is known as subordination of the federal tax lien. The IRS may issue a certificate of subordination to a federal tax lien. This certificate of subordination allows a named creditor to move its junior creditor position ahead of the government’s position for the property named in the certificate.
Generally, IRS guidelines instruct that the agency must exercise good judgment in weighing the risks and deciding whether to issue a certificate of subordination and subordinate a federal tax lien. This exercise of judgment is similar to the decision that an ordinarily prudent business person would make in deciding whether to subordinate his or her rights in a debtor’s property in order to secure additional long run benefits.
Subordination has occurred in cases where, for example, a taxpayer’s mortgage lender is offering refinancing or a workout. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral. The IRS may also consider subordination in other cases.
Subordination does not remove a federal tax lien. The lien remains in place. Keep in mind also that the IRS has discretion whether to accept or reject subordination of a federal tax lien.
Please contact our office if you have any questions about subordination of a federal tax lien or federal tax liens in general.