Using IRS Form 4506-T in Mortgage Loan Processing, Quality Control, & Auditing

Following the financial crisis in the mortgage markets in 2008, lenders have increased the standards of document review and verification that are part of the loan process. Lenders are required as part of the Dodd-Frank Act to perform a thorough review of applicants’ financial records. Not only are applicants required to submit their W2’s, 1099’s and copies of their tax forms, they are also expected to sign a 4506-T IRS records release authorization giving the lender approval to cross-check the financial information that they are providing to the lender.

Using the 4506-T as part of the mortgage loan process is straight-forward.

After collecting the financial documents required by their firm, the mortgage lender will provide a 4506-T form to the prospective borrower. The document is easy to fill out and there are no fees to either the borrower or the lender associated with using the 4506-T. Additionally, each document request to the IRS requires a separate 4506-T. Since the request is to a government agency there is no inquiry made to or displayed by the credit reporting bureau reports.

While the IRS has 48 hours to process the requests, most documents are provided within 24 hours.

As part of the lender’s quality control and auditing procedures, the lender uses the record transcripts returned by the IRS to verify against the documents provided by the loan applicants.

Factors that can complicate the procedure include itemized deductions, self-employment losses and capital gains and losses. In these circumstances the lender will typically order additional IRS documents such as Schedule C Profit or Loss From a Business, 1065 Partnership Income Statement, Schedule D Capital Gains and Losses and 1120 Information on Certain Persons Owning a Corporation’s Voting Stock.

Discrepancies in the amounts provided by the borrower or net income amounts from what is obtained from the IRS by the 4506-T request(s), can result in changing the loan approval amounts that the lender is able to authorize.

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How To Use 4506-T: Bankruptcy Applications

The 4506-T form is one of the most important non-tax forms that the IRS handles. It’s the form to request tax transcripts and is needed in a myriad of applications like student financial aid, mortgages, small business loans, and even bankruptcy. Tax transcripts have replaced copies of tax forms as definitive proof of income, proof of filing status, and proof of taxes paid. Electronic services for easy retrieval of tax transcripts have made getting transcripts very quick and easy.

The 4506-T form in particularly important for those filing bankruptcy. The bankruptcy code requires that all Chapter 13 filings include returns for the last 4 years prior to the date of filing for bankruptcy. These forms must be filed with the IRS before the first creditor meeting. It further requires that those filing bankruptcy must also timely file all tax forms that become due after the bankruptcy filing date. Tax transcripts are a definitive proof of filing and incomes so they are often required by trustees as early as possible in the process.

Tax transcripts help trustees and the judge properly determine your income level and the type of bankruptcy that you might be eligible for. Income requirements are different for the types of bankruptcies. If your income is too low, you might not be eligible for a Chapter 13 and if your income is too high, you might not be eligible for a Chapter 7 filing. Since trustees have a good look at your income with your tax transcripts, they can determine the likelihood that you can repay the debt and your eligibility for debt relief.

If you are going to file bankruptcy, now is a good time to fill out a Form 4506-T to request your most recent tax transcripts. Remember to request the 4 most recent years, depending on the type of bankruptcy you are filing. If you use an electronic service to file Form 4506-T, then you can speed up the process of getting your tax transcripts.

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Why You Might Need A Form 4506 T For Your Tax Returns

Your tax returns are very important documents because they are usually the best way to prove your income. It’s always important to keep your tax returns stored away both in a place you can store printed copies, or electronic copies such as a computer hard drive, removable media, cloud or email servers. But on occasion tax return copies can still get misplaced when you need to have them handy. In such cases when you need to find a return that was made a two or three years ago, you may need to ask the IRS for a transcript.

What An IRS Transcript Is

A transcript is basically an abbreviated copy of your tax return that’s IRS certified and is easy for other parties to verify. A transcript not only can replace a lost tax return copy, but in some cases it may actually be preferable to a regular copy particularly if your tax return forms contain an overwhelming amount of income or royalty information. With a verifiable tax return transcript, the parties who are inquiring on your income can find the most pertinent information without having to sift through pages of numbers.

What A Tax Return Transcript Is Needed For

Whenever you apply for funds in the form of loans or even federal grants, banks, lending institutions, and federal agencies usually need to see your tax returns. The reason for this is to prevent fraud or deceptive practices by borrowers who might try to take out more money than they’re qualified for, and to make sure that they can repay amounts they’ve borrowed. And when a Form 4506 T is filled out you can specify the inquiring parties name and address so that they know the form is coming directly from the IRS in the mail. In some cases you can have a third party process the form if you need the tax return transcript expedited.

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How To Use 4506-T: Immigration Applications

In many cases, immigration applications require submission of IRS Form 4506-T, Request of Transcript for Tax Return. This form gives the IRS permission to release a transcript of a taxpayer’s returns as well as W-2 and 1099 filings to the individual or a third-party. The 4506-T is similar to Form 4506, except that 4506 is used to request complete copies, whereas Form 4506-T is appropriate only for transcript requests.

Sponsors on immigration applications are generally required to include either copies of tax returns or IRS transcripts, and in this case the sponsor can simply indicate USCIS as a third-party recipient on the 4506-T. Immigration only requires the most recent tax return, but IRS transcripts include information for the last three years. You can also use the 4506-T to request information listed on W-2’s and 1099’s for the previous 10 years.

The most complete IRS transcript is called a Record of Account, which includes both specifics from your tax return and your payment history. In the event that you need both a Record of Account and Information Return Transcript (W-2, 1099, etc.), you would need to submit two 4506-T’s. You can also order a Verification of Non-Filing, which states that you did not file tax returns for a given year.

Ordering a 4506-T is a fairly straightforward process whether you do it yourself or you use an IRS bulk vendor. However, there are sometimes problems. The most common reason that the IRS rejects requests is that the address provided for the previous return year does not match the address listed in the actual return on file. Be sure to include any previous addresses on the form.

In addition, it is important to be certain that an IRS transcript will be sufficient to support your immigration sponsorship application. Individuals who are W-2 employees should have no problems going the 4506-T route. However, self-employed individuals must furnish copies of their tax schedule forms, and would therefore have to provide these copies separately, or else provide a complete copy of their return for the previous year.

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How To Use 4506-T: Student Loans

When filing for student financial aid, school financial aid departments require official proof of income. The necessary proof comes in the form of an IRS tax document called a tax transcript. There are several methods available to receive this document, three of which can be ordered online: an online request to download the transcript online, an online request to send the transcript by mail, and (in the case of no taxes filed) an online request for a non-filing letter. You can also order the transcript by telephone or by mail. All these methods are free of charge.

When using any of these methods to order tax transcripts, the student must include their Social Security Number (SSN), date of birth, their street address, and ZIP Code as is currently on file with the IRS. The student must also request the tax transcript from the correct tax year, which is the previous year’s taxes filed with the IRS.

No matter what method you use to obtain your tax transcript, it is your responsibility to properly fill out the form and deliver it to the financial aid office of the school of your choice. Schools cannot accept your tax transcript directly from the IRS.

When filing a request for tax transcripts by the use of the paper method, simply download the pdf from the IRS site of form 4506T or 4506T-EZ. You will need to fill out lines 1-4. Line 5 allows you to have the IRS send the tax transcript to a third-party. Do not request the transcript be sent to the school for which you are filing. The IRS will send the tax transcript to the address they have on file, per tax law.

After receiving the transcript, the student must sign their name to each page in acknowledgment that the information is factual and correct. Make a copy of the document for your records and deliver the tax transcript to your financial aid office.

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