IRS Lien Subordination: What Lenders and Factors Need to Know
- LMU Fin
- Apr 25
- 3 min read
When a business has a federal tax lien, many lenders and factoring companies hit pause. The fear is understandable — the IRS has a secured interest in the business’s assets, which can threaten a lender’s collateral and repayment. But there’s a little-known tool that can ease that concern: IRS lien subordination.
This mechanism can protect your position as a lender or factor, allowing you to retain priority over specific assets — even with a tax lien in place.
What Is IRS Lien Subordination?
IRS lien subordination is a formal agreement where the IRS allows another creditor (like a factor or lender) to move ahead of its lien in priority for certain collateral. It’s important to understand this does not remove the lien — it simply reorders the priority for specific assets.
For example, if you’re factoring receivables, the IRS may agree to subordinate its lien on those receivables, allowing your advance to be protected. This creates space for lending where there would otherwise be none.
Why Subordination Matters for Lenders and Factors
Without subordination, the IRS lien has first claim over nearly all of the taxpayer’s assets. This can put lenders at risk, especially when advancing against receivables or inventory. In some cases, the IRS may even pursue those assets, leaving the lender exposed.
With a valid subordination agreement in place, the IRS agrees not to interfere with the lender’s claim on specified assets. This provides:
Priority Security – You maintain first lien position on collateral identified in the agreement.
Protection from IRS Collection – The IRS will not levy or seize those assets while the subordination is in effect.
Lending Confidence – You can provide financing even to businesses with federal tax issues, without compromising your risk position.
In many cases, the IRS actually benefits from the financing too — the infusion of capital helps the business stay operational and more capable of repaying its tax debt.
Installment Agreement Requirement
One non-negotiable requirement: the taxpayer must have a formal Installment Agreement in place with the IRS before subordination can be approved.
This agreement shows the IRS that the business is actively resolving its tax liability. Without it, the IRS typically won’t consider any request to subordinate its lien — especially for active businesses seeking ongoing financing.
The agreement must also remain in good standing throughout the subordination period. If the taxpayer defaults or misses payments, the subordination protection may be at risk.
How to Request Subordination
The IRS uses a structured application process. Here's how it works:
Submit IRS Form 14134 – This is the formal application for lien subordination. It outlines the collateral involved, terms of the financing, and justification for how the IRS benefits from allowing the lender to take priority.
Include Details of the Installment Agreement – Either submit a copy or ensure the IRS can verify the taxpayer is current with their plan.
Include other relevant information like UCC Filings
IRS Review – The IRS reviews whether subordinating its lien will improve or accelerate tax collection. If so, the request is typically approved.
Certificate Issuance – Once approved, the IRS issues a certificate confirming the subordination. This is your proof that the IRS agrees to let your interest take priority on the specified assets.
Final Thoughts
IRS lien subordination is a practical solution for lenders and factors who want to fund businesses that have unresolved tax liabilities. When used correctly — and paired with an active Installment Agreement — it can transform a deal from risky to viable.
Rather than avoiding clients with IRS liens, smart lenders are leveraging subordination to protect their interests, help businesses access capital, and support long-term repayment of tax debts.
If you’re working with clients who need financing but have a tax lien in place, it may be worth discussing a subordination request. It’s a win-win: your position is protected, and the IRS sees improved collection potential.
