Does it surprise you to learn that some people prepare two sets of tax returns? If it does, then you may not know why they do it. Preparing one set of returns for the federal government allows a taxpayer to report a lower taxable income than was earned. A tax return that includes an exaggerated income allows a buyer to apply for a bigger mortgage that supports the purchase of a better house.
Understanding Why Form 4506-T Matters to You
When you apply for a home mortgage, the form authorizes a loan officer to receive electronic transcripts of your tax returns. Fannie Mae detected the practice of misrepresenting financial information to loan officers, and it started requiring two copies for every loan application. Now it is common for other major lenders to call for them as well. Lenders use one transcript when you apply for a mortgage and the other when you close. IRS is not allowed to make a profit on verification services, and it has now reduced the $4.50 price per transcript by half.
The intensive use of the form gives potential borrowers reasons to read the fine print on loan documents carefully. Lenders learned from the housing crisis that accepting the accuracy of stated income was an unreliable basis for making a mortgage loan. Consequently, applicants for mortgage loans of any amount must provide confidential financial information. Changing the mortgage loan process to include completion of Form 4506-T allowed Fannie Mae to curtail losses from loans to unqualified borrowers.
Exercising Caution in Authorizing the Form
Pay close attention when your loan officer asks you to complete Form 4506-T. As a powerful tool that accesses your financial records, it can reveal your confidential financial information to strangers and onlookers. An unknown number of lenders, secondary market buyers and settlement officials can view your personal information when you authorize its release.
Limiting Access to Your Files
Form 4506-T is far more than an ordinary document in a blizzard of paperwork that requires your signature. The signature date is essential because the IRS does not send transcripts unless it receives the form within 60 days after you sign it. Boxes on the form give you space to authorize up to four tax years for review, but you can limit what strangers can see by listing fewer. You can take a look at the form by going to http://www.irs.gov.
When the IRS receives an authorized request for your records, it provides these documents:
• 1040: U.S. Individual Income Tax Return
• W-2: Wage & Tax Statement
• 1065: U.S. Return of Partnership Income
• 1098: Mortgage Interest/Student Loan Interest/Tuition Statements
• 1099: Dividends/Interest, Miscellaneous Income, Government Payments and Cancellation of Debt
• 1120: U.S. Corporation Income Tax Return (also 1120-L and 1120-S)
• 5498: IRA, HSA, Archer MSA, Medicare Advantage MSA and Coverdell ESA Contributions
Considering the importance of these documents, make sure to pay special attention to completing Form 4056-T. Once they are released, you have no way to control their distribution.