Lately, we have seen local banks informing taxpayers that if a federal tax lien is filed, the bank cannot proceed with a refinancing of the taxpayer’s home because the bank’s underwriting department will not approve the loan. The existence of the tax lien is the only thing preventing the refinancing. This may be an anomaly. However, if it is the new normal, both taxpayers and the IRS are going to have to get creative in terms of securing the funds from the refinancing.

For many taxpayers with outstanding federal tax obligations, the only asset available to help them satisfy their outstanding obligations is their home. Unfortunately, converting the equity in their home to cash can be difficult.

In instances where the available equity in the taxpayer’s home is sufficient to full pay their outstanding federal tax obligations, a shift may be occurring in how these cases unfold. In those instances, the IRS issues a full pay letter that provides a prospective bank with the amount needed to satisfy the taxpayer’s outstanding obligations, thereby releasing the federal tax lien, and allowing the bank to proceed with the refinancing. This letter is provided to the title company conducting the closing and that company makes sure the funds generated by the refinancing are transferred to the IRS. Proceeding in this manner ensures that the bank conducting the refinancing retains its senior position in the property.

Unfortunately, banks are informing us that they are no longer willing to proceed in this manner because of the existence of the federal tax lien. Therefore, the taxpayer and the IRS must pursue alternative options.

One option for the taxpayer is to convince the bank to write the loan in-house, and then, after the taxes are paid off, refinance the in-house loan using the home as the collateral, which at that point would be free from the lien. One option for the IRS is to allow taxpayers to submit the Form 14135, Application for Certificate of Discharge of Property from a Federal Tax Lien. Granting this certificate would discharge the property from the lien and allow the IRS to receive the funds from the refinancing.

In instances where the available equity in the taxpayer’s home is insufficient to pay the obligations in full, there is a procedure that taxpayers can follow to ensure the bank performing the refinancing retains a senior position in the property while still ensuring that the IRS receives the cash from the refinancing. That procedure is contained in the Form 14134, Application for Certificate of Subordination of Federal Tax Lien.

The Form 14134 requires basic information relating to the refinancing, including, the contact information for the creditor that will receive the senior position in the property and the amount of money that the IRS will receive as a result of the refinancing. The IRS is usually willing to grant the Certificate of Subordination because they want to reduce the taxpayer’s outstanding obligations as quickly as possible. Despite the IRS’s willingness, it is still likely that the bank will be unwilling to proceed because of the existence of the federal tax lien. Even if a Certificate of Subordination is granted. If that is the case, the taxpayer and the IRS will need to pursue the alternative options described above.

Regardless of how it is accomplished, obtaining the funds from a refinancing is often times in both parties best interests and so it is important that they figure out a way to make it work.