For lenders, verifying a borrower’s income is one of the most important parts of the underwriting process. Pay stubs, W-2 forms, 1099 forms, tax returns and profit-and-loss statements can provide valuable information, but lenders frequently need something more: independent verification directly from the Internal Revenue Service.
That is where IRS tax transcripts become important.
Tax transcripts allow a lender to compare information supplied by a borrower against information contained in IRS records. They can help confirm income, identify discrepancies, verify self-employment information and provide another layer of protection against inaccurate or fraudulent loan documentation.
The problem is that obtaining transcripts directly from the IRS is not always as simple as requesting a document and receiving it immediately.
There are authorization requirements, IRS forms, taxpayer information that must match government records, processing procedures, rejected requests and different types of transcripts. A small mistake on an authorization can delay a file at exactly the wrong time—when a loan is approaching underwriting approval or closing.
For lenders, the question therefore becomes:
How do I get my client’s tax transcripts quickly, accurately and with as little disruption to the loan process as possible?
Two of the primary methods are IRS Form 4506-C and IRS Form 8821.
Companies specializing in IRS transcript retrieval, such as IRSTaxRecords.com, can handle the process for lenders and help turn what can otherwise be a complicated government-record request into a manageable part of the lending workflow.
Why Lenders Request IRS Tax Transcripts
From a lender’s perspective, income verification is about much more than collecting paperwork.
The lender is making a credit decision involving potentially hundreds of thousands—or even millions—of dollars. The ability of the borrower to repay the obligation is central to that decision.
A borrower may provide a copy of a Form 1040 showing a certain amount of income. A self-employed applicant may provide business returns. Another applicant may provide W-2s or 1099s.
The lender still needs to determine whether those documents are consistent with information reported to the federal government.
IRS transcripts provide an independent source of information.
Depending upon the transcript requested, lenders may be able to verify information associated with:
- Form 1040 individual income tax returns
- Form W-2 wage information
- Form 1099 income
- Form 1120 corporate returns
- Form 1120-S S corporation returns
- Form 1065 partnership returns
- Tax account activity
- Return information and filing history
For a lender, this creates an important distinction.
There is a difference between asking, “What documents did the borrower give us?” and asking, “What information does the IRS have?”
Both are useful. The second provides independent government-source verification.
Income Fraud Has Become More Sophisticated
Income fraud is not a new problem in lending, but technology has changed how easily financial documents can be created or altered.
Professional-looking bank statements, pay stubs, W-2s, tax returns and business documents can now be modified or recreated with relatively inexpensive software. Artificial intelligence and increasingly sophisticated document-generation tools have made it possible to produce materials that may appear legitimate during an ordinary visual review.
That makes independent verification increasingly important.
A document does not become reliable simply because it looks professional.
When a lender relies exclusively on borrower-supplied documentation, the lender may be relying upon information that originated with the same person seeking approval for the loan.
IRS transcripts introduce an independent source into the verification process.
For example, if a borrower supplies a tax return showing income of $175,000, obtaining the appropriate IRS transcript gives the lender an opportunity to compare that representation against IRS information.
If the information agrees, the lender has another level of support for the underwriting file.
If it does not agree, the discrepancy can be investigated before the loan closes.
That is the purpose of verification.
It is far better to discover a discrepancy during underwriting than after funding.
Using IRS Form 4506-C to Obtain Tax Transcripts
One of the most familiar transcript authorization forms in the lending industry is IRS Form 4506-C, IVES Request for Transcript of Tax Return.
The form is specifically associated with the IRS Income Verification Express Service, commonly known as IVES.
A properly completed 4506-C gives an authorized IVES participant the information and taxpayer authorization needed to request specified transcript information.
For lenders, the 4506-C process has been used extensively for mortgage lending, underwriting, quality-control reviews and other income-verification purposes.
The form identifies information including the taxpayer, address, requested transcript or tax information and applicable tax periods.
Accuracy matters.
Something as seemingly insignificant as an incorrect address, missing apartment number, incorrect taxpayer identification number, improperly entered tax period or inconsistent taxpayer name can potentially result in a rejected request or additional processing.
That can become particularly frustrating when a loan is approaching a closing deadline.
A lender may believe the transcript has been ordered and simply be waiting for the IRS. Instead, the request may contain a problem that prevents successful processing.
This is one reason lenders frequently use an experienced transcript-processing company rather than attempting to manage the entire IRS process independently.
What Is IRS Form 8821?
Another important authorization method is IRS Form 8821, Tax Information Authorization.
Form 8821 allows a taxpayer to authorize a designated person or organization to inspect and/or receive specified confidential tax information.
The form differs from a 4506-C in several important respects and can be extremely useful when incorporated into an appropriate lender verification process.
With a properly executed Form 8821 and the necessary IRS authorization established, tax information can be retrieved for the authorized taxpayer, forms and periods.
For lenders, one of the significant advantages of the 8821 process can be the speed at which transcripts become available after the IRS has completed the authorization process.
The authorization step is important.
A completed 8821 does not mean that IRS authorization is necessarily instantaneous. The IRS must process the authorization, and processing times can vary.
However, when working through a transcript provider with the appropriate systems and IRS connectivity, transcripts may become available very quickly once that authorization has been established.
This can make Form 8821 an especially valuable option when lenders need an efficient method of obtaining tax information.
4506-C Versus 8821: Which Should a Lender Use?
There is not necessarily one answer for every loan.
A lender's procedures, the type of verification required, investor requirements, compliance policies, timing and the information being requested can all influence the appropriate method.
Form 4506-C is deeply established within mortgage and lending verification workflows and provides a standardized IVES process for requesting transcripts.
Form 8821 provides another method of authorizing access to tax information and can be particularly valuable where ongoing or expedited access to authorized tax information fits the lender's process.
An experienced transcript provider can help lenders understand the operational differences and determine which workflow is appropriate for their needs.
The important point is that lenders do not have to become IRS processing specialists themselves.
How IRSTaxRecords.com Helps Lenders Obtain Transcripts
For a lender, obtaining a tax transcript should be part of the verification process—not a second occupation.
That is the role of IRSTaxRecords.com.
IRSTaxRecords.com works with lenders to obtain IRS tax transcripts using established authorization and transcript-request procedures, including Form 4506-C and Form 8821.
Instead of the lender attempting to navigate IRS submission procedures, transcript retrieval, request status, rejected authorizations and document delivery internally, the process can be handled through a company that works with IRS transcript requests every day.
That experience matters.
A lender may submit only a handful of transcript requests during a particular period. A specialized transcript company processes these types of requests continuously.
That means the company understands the importance of examining forms before submission, identifying common problems and moving the request through the appropriate process as efficiently as possible.
With Form 8821 in particular, IRSTaxRecords.com can retrieve available transcripts quickly once the IRS has established the taxpayer authorization.
The result is a workflow designed around what lenders actually need:
Get the authorization correct, get the request processed and get the transcript into the lender's hands as quickly as possible.
Getting the Authorization Right the First Time
One of the easiest ways to improve transcript turnaround time is to avoid preventable errors.
A lender may be facing a closing deadline and naturally focus on how quickly the IRS can process the request. But processing speed means very little if the authorization is rejected because information was entered incorrectly.
Common issues can involve:
- Taxpayer names that do not properly match IRS records
- Incorrect Social Security numbers or EINs
- Incorrect addresses
- Missing apartment or unit information
- Incorrect tax form numbers
- Incorrect tax periods
- Missing signatures
- Improperly completed authorization fields
- Poor-quality scanned documents
- Information that is inconsistent across the authorization
Names can be especially important.
Consider a borrower who recently married or divorced. The name being used on the loan application may not necessarily be the same name associated with the relevant IRS records.
What appears to be a minor difference to a person reviewing the loan may create an issue when information is being matched against government records.
The same principle applies to businesses.
An LLC's common business name, legal entity name, EIN and tax-return filing information must be handled correctly when requesting business tax information.
Experienced review before submission can prevent a surprising number of unnecessary delays.
Tax Transcripts Are Especially Important for Self-Employed Borrowers
Income verification becomes even more important when a borrower is self-employed.
A traditional W-2 employee may have relatively straightforward income documentation. A business owner can have income flowing through corporations, S corporations, partnerships, Schedule C businesses and other entities.
The lender may therefore need to review several sources to understand the borrower's actual financial position.
This may include personal Form 1040 information together with transcripts associated with Forms 1120, 1120-S or 1065.
Government-source tax information provides another way for the lender to evaluate whether the business and personal income information presented during underwriting is consistent with IRS records.
This can be particularly important when the loan depends heavily on business income.
Fraud Prevention Is About Verification, Not Suspicion
Requesting IRS transcripts should not be interpreted as assuming that every applicant is committing fraud.
It is simply good lending practice.
Verification protects everyone involved in a legitimate transaction.
It protects the lender by providing additional evidence supporting the underwriting decision.
It protects investors by strengthening the documentation behind the loan.
It protects quality-control departments by creating a clearer audit trail.
It can even protect legitimate borrowers by reducing the likelihood that questions about income documentation emerge later in the transaction.
Effective fraud prevention is not about accusing borrowers.
It is about creating a lending process in which important information is independently verified before money changes hands.
Don't Wait Until the Closing Date
One of the biggest mistakes a lender can make is treating transcript verification as a last-minute condition.
If transcripts are going to be required, the authorization process should begin as early as practical.
A rejected authorization submitted several weeks before closing is an inconvenience.
The same rejection discovered shortly before closing can become an emergency.
The earlier the lender orders the necessary verification, the more opportunity there is to correct discrepancies, obtain additional documentation and resolve IRS processing issues without jeopardizing the transaction.
Make IRS Transcript Verification Part of the Workflow
Obtaining a client's tax transcripts does not have to mean spending hours trying to determine how to communicate with the IRS.
The lender's job is to evaluate credit risk and make sound lending decisions.
The transcript provider's job is to help obtain the government-source records needed to make those decisions.
Using IRS Form 4506-C or Form 8821, lenders can obtain tax transcript information directly from IRS records with the taxpayer's proper authorization.
Working with IRSTaxRecords.com can make that process substantially easier.
From reviewing authorization information to submitting requests and delivering completed transcript results, IRSTaxRecords.com provides lenders with a specialized process designed specifically around tax transcript verification.
And in an environment where financial documents can be created and manipulated more convincingly than ever, independent verification has become increasingly valuable.
A tax return tells you what is on the document in front of you.
An IRS transcript helps tell you what was reported to the government.
For a lender making an important credit decision, that distinction can make all the difference.