Tuesday, December 16, 2008

US Treasury, Desperate to Restart Housing, Offers to Subordinate Tax Liens

In an economic move that can only be put on a par with depression-era creativity to restart the flagging (if not comatose) housing industry, the US Treasury today offered to subordinate IRS Tax Liens to speed the sale of houses.

While we all dislike the IRS (it's the national pastime), its job is to collect unpaid federal taxes. Yet, this subordination offer speaks volumes concerning the depth and length of the present (or coming) housing depression.

Consider: A home seller is nearing foreclosure on his or her ("he") existing home, meaning that he cannot service the debt on the existing home. He cannot pay the full tenor of the current mortgage and he cannot pay the taxes he owes to the federal government. Almost certainly, there are many other unpaid debts.

The feds now, not as a matter of hardship, but as a matter of economic policy associated with the stalled TARP program and its ancillary fallout, offer to subordinate federal tax liens.

Did I read that correctly? As a matter of stated tax policy the feds will now routinely (until the economy recovers and all jobs in Lake Wobegon begin to pay above average wages) subordinate federal tax liens? Say it ain’t so.

So, in a refinance to save a home, a US homeowner borrows more money at more favorable rates to pay off a unaffordable mortgage and subordinates unpaid federal taxes to boot?

Its great for the housing industry, but it is also a stark indicator of the depth of this coming economic trench.

How deep?

Welcome to 1934. Cole Porter's Anything Goes just opened on Broadway.

"Reno Sweeney: [singing] In olden days a glimpse of stocking / Was looked on as something shocking, / Now, Heaven knows, / Anything goes!"

The feds voluntarily offering to subordinate tax liens at the refi table. Pinch me. What will they think of next.

Hugh Wood, Atlanta, GA

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December 16, 2008

WASHINGTON - The Internal Revenue Service today announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Taxpayers or their representatives, such as their lenders, may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.

"We don't want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes," said Doug Shulman, IRS commissioner.

"We realize these are difficult times for many Americans," Shulman said. "We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions."

Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property.

In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution's, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination. Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.

To apply for a certificate of lien subordination, people must follow directions in Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. Again, there is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235, Collection Advisory Group Addresses, for address information.

Taxpayers or their representatives may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.

To apply for a tax lien discharge, applicants must follow directions in Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information.

The IRS also urges people to contact the agency's Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction.

Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property. The IRS issues more than 600,000 federal tax lien notices annually.

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Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084

Phone: 404-633-4100
Fax: 404-633-0068

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