For years, it has been standard for a mortgage company to request an IRS 4506-T request from their clients. This form allows the mortgage company to order the consumers tax transcripts with the consumers consent. Lenders would keep these forms in closed loan files in the event a transcript would be needed. Lenders did not actually send the request unless they felt there was something they needed to verify. Not anymore.
One of the changes we’ve seen in the mortgage industry is lenders requiring the actual transcripts in a loan file before they’ll close. This means that the tax return filings must be filed and ample time must be given for the IRS to update their database with the filed returns before a consumer can close on the loan. This process can take several months AFTER the IRS actually receives the tax returns! This has caused issues with consumers buying or refinancing who do not have filed tax returns due to extensions or the tax returns are filed but they’re simply waiting for the IRS to show them in their system. What happens if they can’t get the transcript? Simply put, most mortgage lenders will not let the consumer close on a loan. This is not an issue for many consumers but for the few who have late filings or amended returns, this could be disastrous.
I’VE SENT MY MORTGAGE COMPANY MY TAX RETURNS…WHY DO THEY NEED MY TRANSCRIPTS?
For those who haven’t seen a transcript, it’s basically a summary of everything you would see on a 1040 tax return filing. 1040 tax returns are typically requested for a mortgage application and along with all schedules/worksheets, gives all detail as to how the tax return was filed. So why would a mortgage company need a transcript? It’s a good question that I hear often from my clients. Here are several reasons why lenders request IRS transcripts:
- WAS THERE SOMETHING WE WERE MISSING?- Transcripts will show figures from all applicable schedules that may not show on the 1040 tax returns. For instance, a Schedule C shows a breakdown of business income and expenses. Also, a Schedule E shows a breakdown of all investment real estate income and expenses. Many consumers will only send the 1040 returns and not include schedules. These figures affect a loan application and the way a lender sees a consumers portfolio.
- DID YOU AMEND YOUR TAX RETURNS?- A consumer may be giving their mortgage company a tax return, but what if their accountant did a small amendment that the consumer forgot to disclose? The transcripts will show the correct figures as received by the IRS including any updates.
- WE HAVE TO USE THE “F” WORD, BUT HOW DO WE KNOW THE TAX RETURNS AND TAX FORMS AREN’T FRAUDULENT?- Maybe not the “F” word you were thinking of, but in our industry, this word is a million times worse. One of the reasons lenders now request these transcripts is because when they did order transcripts on OLDER loans that defaulted, they found many of them had fraudulent documents including fraudulent tax forms and returns.
- ARE YOU BEHIND ON YOUR TAXES?- You can buy a home with taxes due, but you can’t if the IRS files a lien. The consumer transcripts will show if the consumer had a large tax bill due. If there was, the lender is likely to ask for proof that the taxes were paid.
This is one of the reasons it’s so important that both the client and lender follow due diligence and collect ALL documentation prior to committing to a closing date on a loan. Especially on a home purchase where there’s a seller involved. Lenders should be requesting these transcripts at the beginning of the loan process, not the end. I’ve heard too many horror stories of “Approved” consumers who are turned down at closing because the tax transcripts are not available. It’s fairly new, so more mistakes will be made now than later.
I NEED A MORTGAGE AND MY TRANSCRIPTS ARE NOT RECEIVED BY THE IRS…WHAT CAN I DO?
Every lender policy regarding tax transcripts will vary but for the most part, most lenders want these to close. on a loan If you need a mortgage now and haven’t filed your returns, be sure to disclose this to your lender and prepare your returns for filing as soon as possible. When they’re completed and ready to be filed, you can get your returns expedited to the IRS through their local Taxpayer Advocate Service (TAS) office. For those that don’t know who TAS is, here is an excerpt from their website:
Taxpayer Advocate Service (TAS) Mission: As an independent organization within the IRS, we help taxpayers resolve problems with the IRS and recommend changes that will prevent the problems.
Here are seven things every taxpayer should know about TAS:
1. TAS is your voice at the IRS.
2. Our service is free, confidential, and tailored to meet your needs.
3. You may be eligible for TAS help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn’t working as it should.
4. TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals.
5. TAS employees know the IRS and how to navigate it. We will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved.
6. TAS has at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service — Your Voice at the IRS, and on our website atContact Your Advocate. You can also call our toll-free case intake line at 1-877-777-4778.
7. You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www.taxtoolkit.irs.gov
From my experience, a local TAS office can rush the filing, provide receipt of the filed tax returns, provide accurate dates as to when the transcripts will be available and sometimes even write letters in behalf of the consumer stating the returns were filed and received by the IRS. This can be very helpful if you need to close on your home loan quickly.