When the IRS issues a federal tax lien, it lays claim to the profits from a sale of property. For taxpayers who owe large amounts of money to other obligations, though, this can pose real financial problems, especially if they are unable to meet their other obligations on their own. In some cases, the IRS is willing to allow other creditors to receive profits from the property sale ahead of the government. This process is done by applying for a certificate of subordination of a tax lien. However, since the agency does not grant all of these requests, it is essential that taxpayers who apply for the certificate follow the application guidelines carefully. 

What is a Federal Tax Lien?

A federal tax lien is a claim that the IRS places on the profits from the sale of taxpayers' property. In most situations, these liens are placed when taxpayers owe back taxes to the IRS, usually $10,000 or more, and do not make any efforts to repay their tax debts. Before the IRS can issue a lien, agents must send a written document called a Notice of Intent to File a Tax Lien (NFTL).

If the taxpayer does not attempt to resolve the tax debt within 30 days of receiving this notice, the agency will place the lien on his or her property. Generally, taxpayers must pay their debt in full in order to get the tax lien released. Once a lien is imposed, the action is reported to credit reporting agencies, which can impact the taxpayer's credit rating for up to seven years.

How Does a Subordination of a Tax Lien Work?

In some cases, the IRS will allow other creditors to place a claim to the profits from the property sale ahead of the federal government. This is called a subordination of a tax lien. In effect, the agency is allowing the other creditors to jump ahead of the government and receive profits from the sale first. As an example, if a taxpayer is facing foreclosure, the agency may consent to allow the mortgage company to receive its share of the profits from the sale first, leaving the remainder for the government to collect.

Applying for a Certificate of Subordination of a Tax Lien

To apply, a taxpayer or a creditor must complete Form 14134 "Application for Certificate of Subordination of Federal Tax Lien". The form comes with detailed instructions that describe exactly how to complete the paperwork. To request the certificate, the taxpayer or the creditor must provide specific information such as contact information for the lender, a description of the property in question, and a current property appraisal.

A certificate of subordination of a federal tax lien can allow a taxpayer to meet his or her obligations to an outside creditor before having to repay the terms of a federal tax lien. To apply for the certificate, individuals must complete the appropriate form carefully and meet the standards of the program.