Federal Tax Lien Priority: Over Your Mortgage?


Yesterday, a client asked us if there were a circumstance in which a Federal Tax Lien priority would ever be higher than an existing mortgage.  While we believed that as a matter of public policy that the Federal Tax Lien priority never would, we thought it was a great opportunity to discuss federal tax liens and how they work in relation to previously recorded liens and mortgages.


1. How Does Federal Tax Lien Priority Work?

A priority lien, after fees and property taxes, are liens that have ‘priority under federal law’, such as mortgages and other secured asset loans.


Maybe that doesn't help much, so think about liens a a deck of cards. The Ace is the highest. That would be your first mortgage. If you get  second mortgage, that second mortgage would be the King. If the IRS filed a federal tax lien, that would be the Queen. Then suppose a hospital filed a judgment lien — that would be a Jack. 


2. Why do lenders care about priority?

Simply put, lenders want to be repaid. If they are not, they want to be able to recover what is owed to them in a court. Priority liens are paid in the order that they were filed on the land records. In a court distribution of foreclosure proceeds, the first lien holder would be paid in full (if possible) and the subsequent lien holders would be paid up to the limits of the available proceeds. Thus, priority is vital.


If the Ace wants to foreclose, the Ace gets paid off in full before anyone else does. If there is no money left for the King, Queen and Jack after the Ace forecloses, then tough luck for them.


The lesson is, if you are loaning someone money, you want to be the Ace. If you can't be, you'll charge the highest interest rate you can for having a lower security interest in the property or you simply won't make the loan…it's too risky.


3. What happens if a mortgage is secondary to a federal tax lien?

The short answer is that such a situation would not normally occur. No *standard* lender will agree to have the IRS hold a card higher than theirs because at anytime, a higher card could completely wipe out the value of the lower card.


Refinancing poses another problem. It is not a purchase money mortgage and thus does not have purchase money mortgage protections. Practically speaking, the existence of the lien on the property would be recorded and thus the lender would not lend unless the lien was either withdrawn, discharged, subordinated or paid off at closing. As with other liens, the lender can obtain a payoff statement from the IRS and pay it at the closing from the proceeds of the loan.


4. Are there ways to make a federal tax lien priority lower?

Yes. The IRS Collection Process (Publication 594) at page 5 will under certain conditions, either release, request a certificate of non-attachment, withdraw, discharge or subordinate a federal tax lien. If you want to finance, it is still possible to do so because the tax liens can be withdrawn, discharged or subordinated.


5. Why are property taxes different?

The law provides that municipalities and other taxing districts have the right to collect property taxes and other fees from property owners. If those taxes go unpaid, then a super-priority lien can be filed which would even trump the Ace! 


Think of unpaid property tax liens as being like the Jokers. As long as the property taxes are paid, these cards are not in play. But if the Joker does come into play, it becomes trump in a foreclosure suit and can wipe everyone else out, including the IRS.


If you need assistance with a lien withdrawal, contact us to set up a free consultation. Call us at 888-727-8796 or email info@irsmedic.com.