When you’re applying for a mortgage, auto or business loan, you’ll be asked for a variety of documents to prove your income. The lenders will typically ask for your credit history, information on your debt, recent paystubs, legal documents like divorce decrees and your tax information. It’s important to understand the difference between your federal tax return and your tax transcript.
Knowing The Difference Between Your Tax Return And Tax Transcript
You should already be familiar with tax returns. Each year, you file a tax return to determine whether you owe taxes to the government, or if the Internal Revenue Service must submit a refund to you. It’s a process that every working person in the United States goes through. The information on a tax return is detailed. It shows your income, deductions and tax credits. There are sometimes additional forms that need to be filled out in conjunction with your tax return for certain deductions. While your tax return contains valuable information for lenders, it’s not always easy to get a clear picture of your income.
A basic tax transcript clearly shows your line items such as your adjusted gross income. Something to note is that if you make a mistake on your tax filing and have to adjust it, the original tax transcript will not show any update to your taxes. You can request a tax account transcript that shows your income information plus your marital status, return type, and taxable income. There is also a combination of both of these tax transcripts available called a record of transcript.
From time to time a person is asked to prove his or her income by producing tax returns. This is why tax preparation experts recommend holding on to tax returns for several years. But what if a person doesn’t have copies of his or her returns? Tax transcripts will do.
A tax transcript is essentially an abbreviated copy of your tax return with most of the original information left intact.
Different Types of Transcripts
There are five different types of transcripts you can obtain from the IRS. The most common is the tax return transcript. It shows almost all of the line items from your original tax return. This includes items from any forms and schedules you submitted.
The tax accounts transcript is the second type of transcript. It doesn’t contain all of the information from the tax return in question. It only contains information pertaining to adjustments you made after filing that tax return. If you need all of the information contained in these first two types of transcripts, you can request a record of account transcript instead.
The fourth transcript is the wage and income transcript that contains information on certain forms. Last is the verification of non-filing letter transcript. It proves that no tax return was filed for that tax year.
Reasons for Requesting a Transcript
You might need a text transcript to prove your income in order to buy a home or get a car loan. Small business owners come to mind here. They rely on tax records to prove their income in the absence of documents like W-2 forms and pay statements.
You might also need the information from a tax transcript to complete future tax returns. Perhaps you are facing an audit. A transcript could act as supporting evidence on your behalf. Note that tax transcripts only date back three years.
If you’re in the process of applying for a mortgage, it’s likely you’ve been providing the underwriter with lots of documents. Mortgage companies typically ask for pay stubs, legal documents, and bank statements to verify your financial well-being. The mortgage underwriters may want more information in situations where you’re self-employed or if you can’t prove your income in a traditional manner.
Why Is My Lender Asking For Tax Transcripts?
You may have already provided your loan company with a stack of documents including your income tax returns. Unfortunately, the underwriter can hold up your mortgage by asking for even more documentation. It’s common for loan companies to ask for your tax transcripts. These are often used to cross-reference with your tax return to verify your income information. Underwriters prefer to use tax transcripts for this process because they are sent directly from the Internal Revenu Service (IRS). There’s no possibility of fraud or altered information because it comes from a bonafide agency.
What Will My Tax Transcript Show The Lender?
Your tax transcript is a line item document with the information necessary to verify your income tax filing. It will show the information that’s relevant to your underwriter when it comes to proving your income. The underwriter may want the past two or three years of your tax transcripts in order to approve your loan.
How Do I Get My Tax Transcripts?
The IRS protects your private information, so you’ll need to request that the tax transcripts be sent to your lending company. You can do this by filling out form 4506-T, but you need to make sure to put the lender’s address on the request so it’s sent directly to the company. The 4506-T form can be downloaded from the IRS site, or you can call and request the form. If on the other hand you’re a business and need 4506-Transcripts processed at scale, then it’s best to use a professional firm such as 4506-Transcripts.com.
Banks have become more cautious than ever since the mortgage crisis, so they are no longer able to simply ask if a person has the ability to repay a loan. There are many people able to provide enough information without resorting to the bank asking for tax returns, and their loans will tend to be processed quickly. For those who do not fit into this particular category, the bank is allowed to request tax returns under certain circumstances.
Most people work for an employer, and their pay stub from a weekly check will be enough evidence to show sufficient income. This is what the bank needs to decide whether or not a loan can be granted, and those who can provide it have an easy path to getting their loan examined for possible approval by the bank’s lending division.
If a pay stub is not available, a federal form W-2 is generally acceptable for the purpose of a bank loan application. It gives the amount of income for the year, and the bank is capable of using that information to decide whether or not a person will be able to afford the loan payments.
Those who do not work for a company often have a more difficult path to follow, and the bank may decide that they need to see their tax returns. They will not ask the person to provide them as they are not certified. Instead, the bank will send a 4506-transcripts request to the IRS so that they can get copies of the person’s returns for the past few years. Their goal is to help a client seeking a loan to prove they do have the income to repay any loan that is granted.
It is seldom that any bank wishes to lengthen the loan application process, but it can be necessary. For those who are dependent upon income not covered by a regular employer, it could be a step they must get used to if they are going to borrow money.
When you’re ready to apply for a business loan, there are many factors you need to be aware of. Applying for a business loan is easy but getting the loan approved can be difficult. While there are plenty of options when it comes to finding a lending institution, it can be hard to know the best way to get a loan.
Business loan applications start by asking for basic information about your business location and your personal details. The lender will want your profit and loss statements, tax records and other documents related to your company. Here’s the part that may be surprising to a lot of small businesses, banks do look into your own personal credit file when you apply for a loan.
It’s common for financial institutions to do a credit file inquiry after you apply for a loan. After all, the lender needs to know whether you’ll be responsible and pay the loan back. Your credit score will play an important factor in the decision to underwrite your business loan. Credit scores reflect your willingness and attitude when it comes to paying back the loan. Your credit history may also be checked in terms of available credit, inquiries, payment history and public records.
New business owners who don’t have the ability to show their profitability will need to have good to excellent credit scores to be considered for a business loan. If your current credit score is low, then now is the time to improve it. Credit scores can be raised by paying on time, having a low debt to available credit ratio and disputing anything that’s wrong or old. To dispute a credit entry contact the credit reporting company that’s showing the error. Each of the three credit bureaus has easy dispute processes to help correct credit records.