When a tax debtor cannot meet his or her tax obligations, more often than not the result is a Notice of Federal Tax Lien and effectively a lien on the debtor’s assets. If the tax debtor’s principal asset is his or her home, a lien on that home can make it all but impossible to refinance the home. This is because the bank from whom refinancing is requested will not extend any kind of a loan secured by property on which there is a superior security interest. If it did so, the bank’s interest in the mortgage would potentially be at risk, namely because the superior lienholder could foreclose on the property to satisfy that debt, and thereby leaving the bank high and dry.
Yet the Internal Revenue Service (IRS) has come to recognize this state of affairs, and as a result has become more willing to create more viable situations for taxpayers seeking to refinance. Specifically, the IRS has made it clear that it is willing to subordinate its own security interest in the property on which the taxpayer is seeking to refinance a mortgage to that of the bank’s security interest. Internal Revenue Service, “IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell,” available at https://www.irs.gov/newsroom/what-if-there-is-a-federal-tax-lien-on-my-home. By doing so, homeowners seeking to refinance can now do so notwithstanding outstanding tax debts owed to the IRS. The IRS may also be willing to discharge its claim altogether if the home is being sold for less than the amount of the mortgage, i.e. if there is a short sale taking place.
Taxpayers seeking to take advantage of this opportunity to discharge or subordinate an IRS tax lien must do so approximately 30 days in advance of the date on which they will need the subordination or discharge to occur for refinancing purposes. There are also a number of other instructions to which taxpayers seeking to refinance should be aware of, which can be found in Publication 783, Publication 784 and in Publication 4235. While these publications can be useful in assisting taxpayer seeking to subordinate or discharge tax debt in an effort to refinance, there is usually no substitute for consulting an experienced tax professional. Thus, those taxpayers seeking to learn more about how these options can work for them should consult such a professional that can assist them with the particular circumstances of their case, and guide them throughout the process.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.