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Connecticut CPA
May/June 2012
he two previous articles in this
series, Part I: Lien Basics and
Part II: Priority of the IRS Tax
Lien, provided an introduction to the
IRS tax lien and described the prior-
ity of creditors at different stages of
the lien process. This final article
describes what options for relief are
available to taxpayers who are subject
to the lien.
Suppose your clients own real estate
that has suffered fire damage and is
now worth $150,000 and underwater
with a mortgage balance of $200,000.
Adding to your clients' woes, the IRS
has filed a lien for $100,000 of unpaid
taxes, penalties, and interest. Despite
their troubles, your clients have one op-
tion that could help them resolve their
financial difficulties. If the bank would
loan them $200,000 to restore the real
estate, an independent appraiser esti-
mates they could sell the property for
$500,000 and pay off their debt. The
problem? The IRS takes priority over
the bank, so the bank refuses to make
the loan. How could your clients solve
this problem?
Subordination and Discharge
Fortunately for your clients, they have
several options. Your clients' first op-
tion is to request that the IRS subor-
dinate its lien by issuing a certificate
of subordination. Subordination keeps
the property subject to the IRS lien
but allows certain creditors, such as
the bank, to move ahead of the IRS.
The IRS may subordinate its lien to the
bank if the taxpayer can show that do-
ing so will aid in collection of the tax.
To illustrate, if your clients sold their
unimproved real estate, then the IRS
would collect nothing from the sale
because the bank would be entitled
to the entirety of the sale proceeds.
If your clients develop the property
and then sell, however, then they
could pay the bank $400,000 (the
original loan of $200,000 plus the
new loan of $200,000) and pay the
IRS $100,000. Thus, in this situa-
tion, subordinating the IRS lien to
the bank's interest would aid in the
collection of the tax debt.
Another option is to obtain a certificate
of discharge from the tax lien for spe-
cific property. In this way, the property
is no longer subject to the tax lien and
the taxpayer can transfer a clear title.
paid advertisement
Part III:
Relief from the
Federal Tax Lien
By Laura E. Pisarello, Esq.
IRS Tax Liens