Jan. 7, 2019 –
Verifying Income in Lending Using IRS Tax Transcripts
An important, and in some cases required, step in lending is determining a loan applicant's ability to repay the loan. Lenders investigate, evaluate, and document a borrower's income, assets, and employment, as a part of this critical lending step. This examination is meant to detect potential fraud by verifying the borrower's income as well as validating the borrower’s capacity to repay the loan.
Lenders typically do not rely on what consumers tell them about their income. Lenders will verify this information using various sources, such as paystubs and phone calls to employers to perform this income verification check.
A common approach to verifying income is usage of the borrower’s income using tax returns. The tax returns can be provided by the borrower, or a service provider, such as a CPA. Another, more trusted, alternative is to obtain borrower’s tax filing from a third-party service provider who obtains the tax transcripts directly from the Internal Revenue Service (IRS). These tax transcripts are ordered by submitting to the IRS Form 4506-T.
From the IRS:
"Form 4506-T is an Internal Revenue Service (IRS) document that is used to retrieve past tax transcripts that are on file with the IRS. The document must be signed and dated by the taxpayer, thus giving a third party permission to retrieve the taxpayer's data."
Many investors require that tax transcripts be retrieved on every mortgage loan. Comparing the tax returns provided by the borrower, or CPA to the transcripts returned by the IRS ensures completeness and accuracy when calculating the borrower’s income.
Benefits to using an IRS Income Service Provider
A lender can obtain tax transcripts by using a service provider. These service providers are typically very efficient, having established and maintained relationships with the IRS service centers.
Service providers facilitate electronically ordered and retrieved IRS tax transcript forms -- 1040s to 1099s, W-2s, state income reports, and business income tax returns. Basically, any tax document that is filed with the IRS can be retrieved. Upon receipt these transcripts provide an income picture for a borrower and their household, including investment income as well as salary and wages.
These transcripts are typically ordered and delivered electronically. Most providers allow for the capability to accept electronically signed versions of Form 4506-T.
Service providers typically fulfill requests within hours. Turn times are different for each of the IRS service centers that process the order. Service providers are typically assigned to one of the nine IRS service centers. This assignment is important for you, as each IRS Service Center has its own unique processes, service level agreements and turn times. As you evaluate each provider, ask them which center they are assigned to and compare historical performance metrics to ensure you make the best decision.
Service providers are highly experienced in navigating the complex processes of the IRS system. They understand how reports get “hung up” in the system and run quality and completeness checks on the submissions before they are submitted to the IRS. This saves time by giving you a chance to fix any issues up front.
Service providers often perform additional checks when the transcripts are returned. For example, service providers check for potential fraud by electronically comparing the income-related lines of a borrower provided tax return with the same lines on the transcript received from the IRS. Service providers also may check identity, ensuring that the applicant’s Social Security Number is verified against both Social Security Administration and IRS files. Any variations are highlighted by the service provider.
Verification Services provider Credit Plus:
“Our 4506-T system can also provide cash flow analysis that completes all calculations for the underwriter using IRS-validated data, thereby assuring lenders that the original IRS figures have not been manipulated.“
Transcripts retrieved through leading IRS Income service providers may be accepted by investor programs that are meant to reduce, or eliminate, representations and warranties, such as Fannie Mae’s Day 1 CertaintyTM or Freddie Mac's Loan Product Advisor® initiatives.
Questions You Should Ask Your IRS Income Service Provider:
- Which IRS service center fulfills the orders you submit?
- What are the average turn times compared to the orders completed by the other IRS service centers?
- Do you have access to reporting/tracking, that summarizes the inventory, SLA adherence and turn time history of my orders?
- Are you able to accept electronic signature on the form 4506-T?
- Is your service accepted by any investor representation and warranty relief program, such as Fannie Mae’s Day 1 CertaintyTM or Freddie Mac's Loan Product Advisor® initiatives?
- Is your service integrated with my Loan Origination System (LOS)?
Final Thoughts on Why Using an IRS Income Verification Services Provider Makes Sense:
Overstating income is one of the leading causes of mortgage fraud. IRS income tax transcript reports are a common and effective way to fight income related fraud and are generally inexpensive to procure.
Looking for an IRS Income service provider? Click the links below to check out these great options on Vendor Surf: