Borrowing and selling assets to pay taxes. If the Notice of Federal Tax Lien is filed, this is more complicated, so I want to discuss discharges and subordinations.
Selling Assets to Pay Taxes
Let’s start by discussing selling assets. If the proceeds are enough to full pay, call the centralized lien unit at the number on the slide; 1-800-913-6050, and request pay off. When the sale goes through, the proceeds should be submitted to the IRS to pay the debt. When the proceeds are not enough to pay the tax due, apply for a discharge. This removes a specific property from the effects of the Notice of Federal Tax Lien, and the sale is not going to go through without a discharge.
Federal Tax Lien and Discharge of Debt
Discharges are governed by Internal Revenue Code section 6325(b), and there’s several subsections and categories within that. But I want to point out a couple that I think would be interesting to you. Section 6325(b)(2)(A) states that the IRS may discharge property for partial payment of a tax liability and for no less than the government’s interest in that property. Also, the taxpayer’s interest is divested after the sale
Also, I wanted to point out Section 6325(b)(2)(B), which states the government may discharge a property if the interest is zero. For example, in a short sale when a mortgage is ahead of the Notice of Federal Tax Lien in the claim priority and the mortgage is more than the property value. That means there’s no interest for the lien, but allowing the short sale to go through may improve the cash flow of the taxpayer, thereby increasing the taxpayer’s ability to pay (then they can pay the taxes that they owe).
Notice of Federal Tax Lief Filed
If the taxpayer can sell an asset to pay part of the tax and the Notice of Federal Tax Lien is filed, get Publication 783, How to Prepare an Application for Certificate of Discharge of Federal Tax Lien, and get Form 14135, Application for Certificate of Discharge of the Federal Tax Lien. Use the same publication and form if the taxpayer is upside down on property and selling can help improve cash flow.
Borrowing in the face of the Notice of Federal Tax Lien
Now, let’s talk through borrowing in the face of the Notice of Federal Tax Lien. If the amount of the loan is not enough to full pay, you are going to need a subordination. This is the process allowing a lender to step ahead of the IRS’ lien position and makes it easier to get a loan or a mortgage. It doesn’t invalidate the Notice of Federal Tax Lien or the underlying statutory tax lien. Subordination is described in Internal Revenue Code section 6325(d). Section 6325(d)(1) states the IRS may subordinate if the government receives an amount equal to our interest or the interest to be subordinated.
Paying Federal Tax Lien
For example, when refinancing a mortgage to pay off a tax liability: as long as the IRS receives the government’s interest, we will likely facilitate the refinance by subordinating interest to the new lender. Under section 6325(d)(2), IRS may subordinate if as a result the property value increases facilitating collection of the liability. For example, let’s say the taxpayer owns a piece of property that can’t be sold in its current condition. But if they get a loan and rehabilitate the property, they can sell it and pay off either part or all of the tax. Then we’d likely subordinate the Notice of Federal Tax Lien to the lender.
Using Accounts Receivable as IRS Collateral
One last comment on assets: we tend to think of them as real or personal property, but keep in mind, especially for businesses, assets that can be used as collateral are accounts receivable. So, if the Notice of Federal Tax Lien is filed, it will attach to those accounts receivable, and just like with tangible property when getting a loan, you’re going to need a subordination. When seeking a subordination use Publication 784, How to Prepare an Application for Certificate of Subordination.
Discharge Federal Tax Lien
Remember when selling an asset or getting a loan, find out if the taxpayer has the Notice of Federal Tax Lien filed. If they are going to get a loan to pay off their debt, then you’re going to need to start the discharge and subordination process. Make sure that you remember that it takes at least 30 to 45 days to process a request for discharge and subordination; often, it takes much longer. People who submit their applications too close to the sale or the closing of a loan often find that the sale or closing doesn’t go through because there wasn’t enough time to process the discharge or the subordination.