In today’s fraud-addled mortgage market, both borrowers and lenders should become familiar with IRS Form 4506-T. This document enables lenders to request a transcript of a borrower’s tax return from the Internal Revenue Service. The form covers multiple years of income tax filings, contains an exhaustive list of each line item entered on a tax return and can also provide information regarding payments and penalties on an account.
Prior to 2008, it was rare for a lender to require a borrower to furnish copies of federal tax returns: Form 1099s, W-2s and 1040s were sufficient. Sometimes borrowers could simply “state” their incomes. Even borrowers with poor credit, insufficient savings, and high debt were given access to home loans. When countless of these “subprime mortgages” went into default, it became clear that this practice of lending without scrutiny was hugely problematic. Ultimately, this brand of lenient lending gave way to the housing crisis of 2008 and the resulting economic downturn.
In order to prevent a future economic crisis, Congress enacted legislation requiring creditors to assess a borrower’s ability to repay a loan before being offered a mortgage. This assessment includes a thorough evaluation of a borrower’s income, which protects the creditor from fraudulent claims and the consumer from predatory lending.
Requiring a borrower to sign a 4506-T at the time of a mortgage application is one such measure that can be used to verify their financial standing. Form 4506-T allows lenders to obtain up to four years of tax data, though borrowers can specify that fewer years be accessible.
Once the form is signed, the lender has the right to examine the borrower’s past tax filings. The lender can then utilize the 4506-T tax transcript to compare the borrower’s W-2s to his or her reported income. If the findings on the 4506-T match the borrower’s reported income, then the lending process can resume. If not, and there are income irregularities or indicators of fraud present, the lending process will be delayed or terminated and the borrower may be investigated further.