Lien Subordination vs. Discharge: Getting a Business Refinance Closed

A Notice of Federal Tax Lien shows up in title work, an underwriter stops the file, and a closing that was routine an hour earlier becomes uncertain. The fix depends entirely on which of two IRM 5.12.10 remedies fits the deal, and the standards under each one determine whether Advisory can approve it within the time a lender or closing date allows.

Two Different Problems, Two Different Certificates

IRM 5.12.10.2 lays out four ways to address a lien's effect on property short of a full release: discharge, subordination, non-attachment, and withdrawal. For refinancing and sale situations, the relevant two are:

• Discharge (IRC 6325(b)) — removes a specific piece of property from the lien entirely. Use this when property is being sold or transferred and the lien needs to come off that asset for the transaction to close cleanly.
• Subordination (IRC 6325(d)) — doesn't remove the lien at all. It moves a specific creditor ahead of the government's priority position on a specific piece of property, so a new or refinancing lender can take a senior lien even though the government's claim was filed first. IRM 5.12.10.6(5) states plainly that subordination is typically used when the NFTL is being subordinated to a lender loaning money to the taxpayer secured by a mortgage or deed of trust.

The two are conceptually distinct, but the standards underneath each one — which subsection applies, what proof it takes, and how long it runs — are where these applications actually stall. A lender demanding first position on a refinance needs subordination; a buyer taking clean title on a sale needs discharge. Knowing which category applies is only the first step.

Subordination Has Two Tracks, and They Require Different Proof

IRM 5.12.10.6 splits subordination into two IRC provisions with different tests:

• IRC 6325(d)(1) — the taxpayer pays the IRS an amount, dollar for dollar, equal to the interest being subordinated. IRM 5.12.10.6.1(1) gives the clean example: the taxpayer refinances a senior mortgage, increases the loan amount, and proposes to pay the IRS the amount of the increase. Straightforward, and the easiest case to approve.
• IRC 6325(d)(2) — no immediate payment, but the taxpayer has to show the subordination will ultimately increase the amount the government can realize and will facilitate collection. IRM 5.12.10.6.2(3) covers the more common business scenario: a straight rate-and-term refinance where the taxpayer can't pay anything toward the NFTL right now, but lower payments improve the odds of eventually paying the liability. The IRS applies this exact standard to dollar-for-dollar refinancing of a senior lien — the request still has to demonstrate a government benefit, just not a cash one.

For a business owner refinancing to lower payments and free up cash flow, (d)(2) is usually the right theory — but the file has to make the collection-facilitation argument explicitly. A bare request to refinance without that framing gets treated as a favor, not a collection tool, and Advisory has no obligation to grant it.

Factoring Agreements: The Business-Specific Piece

IRM 5.12.10.6.1.1 covers something most general practitioners never encounter: subordinating the lien's interest in accounts receivable so a business can enter a factoring agreement. This is a live option for a business with cash flow problems, but the conditions are tight and worth knowing before a client's factor walks away from the deal:

• The subordination period is capped at one year — but if the business has trust fund tax owing for the preceding quarter, IRM 5.12.10.6.1.1(4) cuts that to 90 days.
• A signed installment agreement (Form 433-D) is required alongside the subordination, with current Federal Tax Deposits or estimated payments as an ongoing condition.
• Per IRM 5.12.10.6.1.1(9), the taxpayer's ability-to-pay investigation and the TFRP investigation must be completed or already in process before the subordination is granted. There's no factoring subordination without addressing the trust fund question in parallel—the same pairing that shows up in CNC and PPIA closures for business liabilities.

Compliance Gets Checked Either Way

IRM 5.12.10.3.6(3) and IRM 5.12.10.6.3(3) both require a full compliance check as part of processing a discharge or subordination application. Non-compliance doesn't automatically kill the request — the IRM is explicit that there's no prohibition on processing an application from a taxpayer who isn't current — but it becomes a factor in whatever "best interest of the government" determination Advisory has to make, and it's the kind of thing that turns a 30-day timeline into a much longer one while filing gaps get closed first.

Timelines

IRM 5.12.10.7.1(8) sets the standard for how fast Advisory has to move: 14 calendar days for a recommendation when a foreclosure sale is pending, 30 calendar days for everything else, unless more expeditious action is warranted. A closing date inside that window needs the application in early — not after the lender has already set a hard deadline.

Why This Matters for Referral Sources

If a bankruptcy or family law client's business needs to refinance and a federal tax lien sits in title, the categories are usually clear to the attorney handling the deal. Where the case actually gets made or lost is in the standard underneath — whether the (d)(1) or (d)(2) theory applies, whether the TFRP and ability-to-pay work is already done for a factoring subordination, and whether the application went in early enough to clear Advisory's 14- or 30-day window before the closing date arrives.