Filing taxes is difficult to understand, with more than four hundred various tax forms to report pertinent financial information. Failure to report information, file returns correctly, and submitting them on time may all result in hefty penalties levied by the Internal Revenue Service. Knowing current and past years’ tax filing information is equally important in many situations.
Tax form 4506-T allows businesses to gain access to tax forms filed in previous years. It may seem like previous years’ tax forms are not important; however, obtaining official copies of these returns is absolutely necessary in several situations.
When corporations go to court, disputes usually consider past levels of income in determining reasonableness, materiality, and dollar amount of potential damages. Filing a 4506-T is the official method of getting past years’ tax returns for use in legal situations. Demonstrating that taxes were paid in full usually hinges on income earned and taxes paid in prior years.
Proving income to creditors and lenders
Securing financing for any purpose requires businesses to demonstrate to lenders that assertions about expected income are true. For large-scale corporate lending, official proof from the Internal Revenue Service is often necessary as part of supporting documents for securing loans. Obtaining tax returns from prior years using a form 4506-T is also valuable in refinancing outstanding balances and lowering current interest rates.
Better record keeping
Whenever a corporation’s employees are uncertain about prior years’ reported income, corporations can file a 4506-T to assure their accounting functions of various information reported. If estimates are changed or new records are realized, amendments to prior years’ tax returns are usually necessary.
Reduce likelihood of estimated tax penalties
Corporations are required to file taxes for times a year. These taxes are estimated, which means they are based on prior years’ incomes. Understanding exactly how much a corporation earned in prior years is necessary for estimated tax payments.
Agencies like the USDA have strict rules concerning income verification for home loans. In the past, it was standard practice for lenders to submit a borrower’s tax transcript ad associated IRS Form 4506-T Request for Tax Transcript. Delays and rejections have become more frequent recently. This has led underwriters of mortgages to question the need for this documentation prior to closing.
Part of the problem arises from delays between the time a 4506-T is submitted and the time the transcript arrives. The Internal Revenue Service cites budget cuts as a primary reason for slow turnaround times.
A more serious problem is that the IRS is rejecting some 4506-Ts. This is a consequence of policy changes intended to prevent fraud and unauthorized access to taxpayer information. The IRS does not want identity thieves using third party tax transcript requests to gather confidential information. When a 4506-T is submitted with incorrect information like an erroneous Social Security number, it is rejected. The lender gets the form back stamped with the term “Limitations.”
Faced with the prospect of continued delays and rejections, agencies and lenders are seeking alternative ways to verify borrower’s income Rob Crhisman says there is no universal answer. Fannie Mae has clarified its existing policy. Fannie Mae requires the 4506-T tax transcript. This requirement doesn’t have to be met prior to closing. The rule is satisfied as long as the documentation is included in the quality control process an underwriter must follow after closing.
Envoy Mortgage has taken a different approach. This stakeholder has reduced the need for the 4506-T by accepting a borrower’s W-2 forms. This substitution is limited to persons who have no income that is not reported on the W-2 form.
In some cases a tax transcript may be required prior to closing. This may not be the case in other situations. The wise course is to check with the agency or lender.
Freddie Mac customers have reported that, a few times, requests submitted through the IRS Form 4506-T have been returned with a rejection code, “Limitations.” These sorts of rejections combat identity fraud and stop unqualified access to taxpayer info.
Rejections of Form 4506-T might indicate red flags like the accuracy of borrowers’ incomes and tax info and / or the SSNs that qualify for loans. Please, for your own good, remember to treat these warnings as seriously as any other fraud warning.
Required for after-funding quality control programs, completing the IRS Form 4506-T is a very important and tried-and-true means of combating mortgage fraud. For further information, examine Section 48.5 of the Single-Family Seller/Servicer Guide.
To ensure the quality of loans Freddie Mac buys, Sellers and Servicers must take all action to clear red flags often found in fraudulent schemes focused on loan origination. They should become comfortable with the risk of lending money. They must also report any instances of fraud or suspicious activity according to the instructions in Single-Family Seller/Servicer Guide Section 7.3 on receiving the rejection message “Limitations” for loans already purchased. Freddie Mac does not need alternative documentation for transcripts refused with this code during post-closing quality control. The following document will help you learn what to look for, how to report fraud or suspicious activity, and preventative steps.
The Financial Fraud Investigation Unit is at the fore of mortgage fraud mitigation. Your efforts toward the same is critical, so thank you for being vigilant.
When a loan is submitted to the Small Business Administration (SBA), the agency reviews it to determine if it will honor or deny the guaranty. As part of this process, it requires lenders to submit certain documentation, including transcripts of the most recent three years of federal tax forms, which are obtained through Internal Revenue Service (IRS) Form 4506-T. The SBA needs to know that the financial information the applicant has provided to the lender matches what was provided to the IRS.
If the lender fails to submit the proper documentation, this will result in an automatic recommendation for denial of the SBA guaranty. While it is possible to later attempt to show after the fact that this failure was not relevant to a default on the loan, such efforts almost never succeed. It is necessary to have everything in order to meet the SBA’s requirements the first time around; practically speaking there will be no second chance.
So what are some of the most common errors lenders make that put their SBA guaranty in jeopardy?
- Failure to submit 4506-T forms on the seller and obtain the seller’s transcripts in the case of a purchase of an existing business.
- Failure to obtain the required number of years of transcripts for the applicant and/or the seller. (If the business is two years old or less, then transcripts are needed only for those years it has existed. If it is an entirely new startup business, transcripts are not required.)
- Failure to obtain the correct transcripts when the status of the business changes during the year from a sole proprietorship to a different type of business entity. (In the case of such a change of status, transcripts of partial year tax returns from both the individual and the business entity are required.)
- Failure to obtain transcripts for the most recent fiscal year. (If the fiscal year ended more than six months from the date of the SBA application, that year is one of the three for which transcripts are required.)
- Failure to obtain transcripts for the Operating Company (OC) and obtaining them instead for the Eligible Passive Company (EPC).
- Failure to reconcile discrepancies between the tax forms and the transcripts. (If there are any such discrepancies that the lender is unable to reconcile, or if there are any required transcripts the lender is unable to obtain, the lender must report this to the appropriate SBA Commercial Loan Servicing Center.)
If a lender does not follow best practices and comply with the SBA’s requirements, then in all likelihood the guaranty will be denied. Thus it is crucial to steer clear of these common pitfalls.