Understanding Lien Discharge, Lien Release, & Lien Subordination
In this article, you can discover:
- The differences between lien discharge, release, and subordination.
- How to apply for certificates of discharge or subordination.
- The consequences, factors, and strategies for successful outcomes.
What Is The Difference Between A Lien Discharge, Lien Release, & Lien Subordination?
Lien Discharge: The IRS agrees to release a tax lien on a specific property, even if the debt has not been fully paid. This is based on the confirmation that the IRS’s interest in the equity from the sale of the asset is being remitted (COD).
Lien Release: The IRS releases a lien after the full payment of a debt.
Lien Subordination: The IRS puts a lender in a priority position, ahead of its lien, in exchange for payment toward the debt owed from the secured lending (COS).
Can A Business Apply For A Certificate Of Discharge (COD) Or A Certificate Of Subordination (COS) Of An IRS Tax Lien?
Both COD and COS applications are complex and require professional representation to navigate the process through the IRS Advisory Unit.
For a COD, the business needs to provide:
- Bill of Sale,
- Appraisal,
- Confirmation of Priority Liens (e.g., existing mortgages or notes on the asset),
- HUD form, and
- Verification of a third-party transaction.
A COS application requires the same documentation as COD, but in addition, a third-party lender must be secured who is willing to accept a loan position that carries a subordinated IRS lien. This can be challenging in many cases.
What Is The Process Of Applying For A COD Or COS Of An IRS Tax Lien?
Both applications require the collection of the necessary documentation and relevant IRS forms, which then need to be filed with the IRS Advisory Unit. The typical timeframe to receive a decision from the IRS is around 45-60 days, although expedited processing may be available in certain circumstances.
What Are The Potential Consequences Of A COD Or COS For A Business?
A COD is typically used when a business aims to sell an asset with a clear title, where the equity goes toward the IRS debt while the asset remains free and clear to the buyer without a lien release being secured.
A COS, on the other hand, is employed when a business seeks to secure a loan for operational purposes and is willing to allow a portion of that loan to be taken by the IRS. A COS is relatively rare due to the challenges of finding a willing third-party lender who accepts a lien still on file.
To best protect their interests during the process of applying for a COD or COS, it is crucial for the client’s business to seek professional representation and navigate the process carefully.
What Are The Key Factors That The IRS Considers When Deciding Whether To Grant A COD Or COS?
The IRS considers factors such as an arm’s length transaction, third-party appeal, and receiving something of value in exchange for granting the discharge or subordination. In most cases, this involves funds applied toward the debt, but it can also include a reduction in business expenses, allowing the business to make larger monthly payments toward the debt if granted.
To best position itself, the client’s business should align the necessary documentation, meet the IRS requirements, and strategize to provide value in the form of funds or reduction in expenses.
Can This Firm Work With Our CPA And Management Team To Negotiate The Terms Of A COD Or COS With The IRS?
Our firm can facilitate the entire process and work with your CPA and management team to negotiate the terms of a COD or COS with the IRS. The key considerations will depend on the specific circumstances of the case and can be customized accordingly.
What Are The Potential Tax Implications Of A COD Or COS For A Business?
A COD can release a clouded title against an asset sold, while a COS can place a lender in first position ahead of an IRS tax lien. When planning to conduct business despite having a tax lien, both strategies need careful consideration to allow for ongoing and relatively unhindered operation. It is recommended to engage in careful tax planning to address these implications effectively.
What Is The Difference Between A Partial COD/COS And A Full COD/COS? How Does Each Affect A Business’s Tax Liability And Creditworthiness?
It is a misunderstanding of the law to differentiate between partial and full COD or COS. By definition, both COD and COS involve partial payments of a lien, resulting in the release of a specific asset or subordination of a specific encumbrance to a third party. All CODs and COSs are inherently partial payments.
How Can A Business Best Prepare For & Manage The COD Or COS Process?
For a COD, the client’s business needs to find a willing third-party buyer at an arm’s length who is aware of the lien and the time it will take to secure an IRS release. Additionally, working with a broker and a tax attorney who can explain the process is recommended. The necessary documentation includes a contract for sale (bill of sale), third-party appraisal, HUD form, and lien and encumbrance information, among other potential requirements depending on the case.
For a COS, the client’s business needs to identify a willing lender who can issue a loan despite the IRS lien being in second place after subordination is issued. The documentation includes loan terms, identification of liens and encumbrances, fee sheet, and closing date.
Our firm handles completing and filing the proper paperwork, packet collation, and submission tracking. We also engage in direct negotiation with the IRS Advisory Unit to ensure a proper negotiation and secure CODs and COSs for our clients.
For more information on the IRS Tax Lien Release, Discharge and Subordination Options for Businesses, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (720) 780-0501 today.