Refinancing With an IRS Lien: Subordination Under IRC 6325(d) and Form 14134

Selling is not the only reason property owners run into an IRS lien. Refinancing hits the same wall, usually harder.

Here is why. When you refinance, the old mortgage is paid off and a new mortgage is recorded. The new mortgage is recorded after the IRS filed its Notice of Federal Tax Lien. Under the first-in-time rules of IRC 6323, that makes the new lender junior to the IRS. No lender in Florida or anywhere else will make a loan that sits behind a federal tax lien.

The fix is a certificate of subordination under IRC 6325(d). It does not remove the lien. It tells the world that one specific lender's loan comes first.

What subordination does and does not do

Publication 784 describes it plainly: a certificate of subordination allows a named creditor to move its junior position ahead of the United States for the property named in the certificate. Once recorded in the same office as the notice of lien, IRC 6325(f)(1)(C) makes the certificate conclusive that the lender's lien is superior.

What it does not do: release the lien, reduce the tax debt, or stop the IRS from collecting. The lien stays on the property in second position. If you later sell, the IRS is still there, waiting behind the new lender.

Two ways to qualify

Section 6325(d) gives two main routes for income tax liens. A third, 6325(d)(3), applies to special estate tax liens and is outside this guide.

6325(d)(1): pay the IRS the amount being subordinated

The IRS may subordinate if it is paid an amount equal to the lien or interest to which the certificate subordinates the government's lien. In a cash-out refinance, that usually means the IRS receives the new equity the refinance creates.

Publication 784 illustrates it with a property worth $200,000, an 80 percent loan of $160,000, an existing loan of $145,000, and closing costs of $4,800. The potential equity is $15,000 ($160,000 minus $145,000). Subtract the $4,800 cost of the loan and the United States interest is $10,200. The IRS asks for $10,200 in exchange for subordinating to the new loan. The lien stays; the new loan goes first.

Think about what that means. The IRS is not giving anything up. It was going to be behind the old $145,000 mortgage anyway. Now it is behind a $160,000 mortgage, but it collected the $10,200 difference less costs. Its position is no worse.

6325(d)(2): the refinance helps the IRS collect

The IRS may also subordinate if it believes the amount it can ultimately realize from the property or from other property subject to the lien will increase, and that the subordination will make collection of the tax easier. No payment is required.

The classic real estate example is a rate-and-term refinance. You owe $380,000 at a high rate and pay the IRS $600 a month on an installment agreement. A refinance to a lower rate drops your mortgage payment by enough that you can pay the IRS more each month. The IRS gets paid faster than it would without the refinance. That is a 6325(d)(2) story.

Publication 784 says a 6325(d)(2) application must include a signed and dated statement describing how the amount the United States may ultimately realize will increase and how collection will be facilitated. That statement is the argument. Write it with numbers.

Filling out Form 14134

Form 14134, Application for Certificate of Subordination of Federal Tax Lien, follows the same structure as the discharge application. The sections that matter most:

• Section 5, Lending company. The lender you want the IRS to subordinate to, and the type of transaction, such as refinance or loan consolidation.
• Section 6, Monetary information. The existing loan amount, the new loan amount, and for 6325(d)(1) requests the amount to be paid to the United States.
• Section 7, Basis. Check 6325(d)(1) or 6325(d)(2), and attach the 6325(d)(2) statement if that is your basis.
• Section 9, Valuation. A professional appraisal is not required for a subordination, but one of the listed valuations is, such as the county valuation or an informal valuation by a disinterested third party.
• Section 11, Proposed loan agreement. Attach it if available and describe why subordination serves the government's collection interest.
• Section 12, Current title report. Required for subordination.
• Section 13, Proposed closing statement. Every cost of the refinance.

Publication 784 directs applications to the same Advisory Consolidated Receipts unit used for discharges and asks for submission at least 45 days before the transaction date. Do not send payment with the application. Under 6325(d)(1), the Advisory Group Manager tells you the amount and when to pay; the certificate issues when the IRS receives that amount.

The HELOC problem

Publication 784 flags an issue that catches homeowners off guard. If you have a home equity line of credit, advances made on it starting the 46th day after the IRS filed its notice are generally subject to the federal tax lien. That tracks IRC 6323(d), which protects disbursements under a pre-existing written agreement only if made before the 46th day after the lien filing, or earlier if the lender had actual notice.

So a HELOC balance may be partly senior and partly junior. The IRS asks applicants to document HELOC advances from the 46th day after filing through the application date, and expected advances through the certificate date. Get the draw history from the lender before you apply.

Refinance versus sale: choosing the right certificate

If you are selling, you need a discharge under 6325(b), not a subordination. If you are keeping the property and replacing or adding a loan, you need a subordination. Sometimes owners with several properties use both: discharge one parcel under the double-value rule, and subordinate another to refinance it.

A refinance can also be paired with lien withdrawal or release strategies, but those are separate requests with separate rules. Keep the subordination application focused on the loan.

Common reasons subordinations get denied

• Cash out to the owner. A cash-out refinance where the owner keeps the equity and the IRS gets nothing will not fit 6325(d)(1), and it rarely fits 6325(d)(2).
• No collection story. A 6325(d)(2) application with no explanation of how the IRS benefits is an application with no basis.
• Unfiled returns. The IRS is reluctant to help a taxpayer who is not in filing compliance. Get current first.
• Debt consolidation that moves unsecured debt ahead of the IRS. Rolling credit cards into a new first mortgage converts unsecured creditors into secured ones that outrank the government. Expect resistance.

If the application is denied, Publication 784 says you will receive Form 9423 and Publication 1660 explaining Collection Appeal rights. Appeals can work when the denial rests on a factual misunderstanding. They rarely fix a deal that does not help the IRS.

Before you lock the rate

Rate locks expire. The IRS asks for 45 days. Those two facts collide constantly. Tell your loan officer about the lien on day one, get the title report early, and file Form 14134 as soon as the loan terms are set. If you are on an installment agreement, have the payment history ready to show the IRS you are a good bet.

For related reading, see selling with a federal tax lien and the Form 14135 guide, which uses the same documents in a different order.

The IRS will step aside for a lender when stepping aside costs it nothing or gets it paid sooner. Build your application around that sentence.