IRS tax transcripts are among the most valuable verification tools available to mortgage lenders, banks and other financial institutions. But not every transcript answers the same question.
A 1040 Tax Return Transcript is very different from a Wage and Income Transcript. An Account Transcript serves a different purpose than a Record of Account. Business returns such as Forms 1120 and 1065 can reveal information that may never appear on an employee's W-2.
Understanding those differences helps lenders request the right record for the underwriting question they are trying to answer.
It is also important to understand one fundamental distinction: an IRS transcript is not a photocopy of the taxpayer's original tax return. It is a record produced from information maintained by the IRS.
Form 1040 Tax Return Transcript
Form 1040 is the primary individual federal income tax return filed by taxpayers each year.
People file Form 1040 to report their income, deductions, credits, gains, losses and ultimately determine whether they owe federal income tax or are entitled to a refund.
For a mortgage lender, the 1040 Tax Return Transcript is often one of the most useful income-verification records available.
The IRS states that a Tax Return Transcript contains most line items from the original Form 1040-series return as filed, including associated forms and schedules. It can show items such as wages, adjusted gross income, taxable income, interest, dividends and information associated with business, rental and other income reported on the return.
For a self-employed borrower, schedules attached to the 1040 can be particularly important. Schedule C, for example, can help a lender understand income or losses from a sole proprietorship.
What it does not show
A 1040 Tax Return Transcript generally does not show amendments or adjustments made after the original return was processed. That distinction becomes extremely important if the taxpayer later filed an amended return or the IRS subsequently changed the account.
For those situations, the lender may need an Account Transcript or Record of Account.
W-2 Wage Information
Form W-2 is filed by employers to report wages and other compensation paid to an employee, along with federal income tax withholding and certain Social Security and Medicare information.
Technically, lenders do not request a separate "W-2 transcript" in the same way they request a 1040 Tax Return Transcript. W-2 information appears on the taxpayer's Wage and Income Transcript.
The Wage and Income Transcript contains information the IRS received from third parties, including employers and financial institutions.
For lenders, W-2 data can help answer a critical question:
Did an employer report wages to the IRS that support the wages represented on the mortgage application?
That makes it extremely useful for cross-checking borrower-provided W-2 forms and other income documentation.
Form 1099 Information
There are many different types of Form 1099, and each reports a different type of payment.
Depending on the form, a 1099 may report:
- Nonemployee compensation.
- Interest income.
- Dividend income.
- Retirement distributions.
- Certain government payments.
- Brokerage transactions.
- Rents or other miscellaneous income.
Like W-2 information, 1099 data generally appears within the Wage and Income Transcript, along with information from Forms W-2, 1098, 5498 and other information returns received by the IRS.
This transcript can be especially valuable when a borrower receives income from several sources.
However, there is an important limitation. The Wage and Income Transcript only contains information returns that have actually been filed with the IRS. It may therefore not represent every income document issued to the taxpayer, particularly if information has not yet been submitted or processed.
Tax Account Transcript
The Tax Account Transcript answers a different question.
Rather than showing most of the original return line by line, it focuses on activity within the taxpayer's IRS account.
It can show basic information such as filing status and taxable income, along with payments, adjustments and other account activity. Importantly, it reflects changes made after the original return was filed.
For a lender, an Account Transcript can help determine:
- Whether the return was processed.
- Whether subsequent adjustments occurred.
- Whether payments were posted.
- Whether penalties or interest were assessed.
- Whether the account shows additional activity after filing.
What it does not provide is the same detailed, line-by-line income picture available from a Tax Return Transcript. The IRS specifically notes that account transcripts are not a substitute for the return transcript's detailed return information.
Record of Account Transcript
The Record of Account Transcript is essentially a combination of two records:
The Tax Return Transcript plus the Tax Account Transcript.
The IRS describes it as one complete transcript combining the original return information with subsequent account information.
For mortgage underwriting, this can be particularly valuable when a lender needs both the original return data and information about what happened afterward.
Suppose a borrower provides a tax return showing $175,000 of income, but the account was subsequently adjusted.
A standard Return Transcript may show the original filing. An Account Transcript may show the later account activity.
The Record of Account brings those perspectives together.
For complicated files, amended-return situations or quality-control reviews, it can provide a more complete picture than either transcript alone.
Form 1120 — Corporate Income Tax Return
Form 1120 is the U.S. Corporation Income Tax Return used by regular C corporations.
Corporations file Form 1120 to report their income, gains, losses, deductions and credits and to calculate the corporation's federal income tax liability.
For mortgage lenders, a Form 1120 transcript can become important when the borrower owns a corporation and business income is being considered in qualifying for the mortgage.
The return may provide insight into:
- Gross receipts or sales.
- Cost of goods sold.
- Corporate deductions.
- Compensation of officers.
- Taxable income.
- Business gains or losses.
- Corporate tax liability.
A business Tax Return Transcript shows most line items from the original Form 1120 as filed. However, the IRS notes that business return transcripts do not necessarily reproduce attached statements or documents and generally do not show changes made after the return was filed.
This matters because revenue is not the same as personal income. A corporation generating $2 million in gross receipts does not mean its owner earns $2 million.
The lender must understand the company's expenses, profitability, ownership and the amount of income that can legitimately be attributed to the borrower.
Form 1065 — Partnership Return
Form 1065 is the U.S. Return of Partnership Income.
A partnership files Form 1065 to report its income, gains, losses, deductions, credits and other business information. Generally, the partnership itself does not pay federal income tax on its profits. Instead, profits and losses pass through to the partners, who report their respective shares on their own tax returns.
Each partner generally receives a Schedule K-1 reporting that partner's share.
For lenders underwriting partners or owners of partnership interests, Form 1065 information can therefore be extremely important.
The lender may examine the partnership's revenue, expenses and overall profitability while also reviewing the borrower's K-1 and personal Form 1040.
Again, the business's total income should not be confused with the individual borrower's qualifying income.
Choosing the Right Transcript
The most important lesson for lenders is that there is no single "best" IRS transcript.
The proper record depends on the question.
If you need to see what an individual originally reported, request the 1040 Tax Return Transcript.
If you need W-2 and 1099 information reported independently by employers and other payers, the Wage and Income Transcript may be most useful.
If you need to know what happened after a return was filed, look at the Account Transcript.
If you need both the return and subsequent account activity, consider the Record of Account.
And when qualifying a business owner, 1120, 1120-S and 1065 business transcripts can add another critical layer to the income analysis. The IRS now makes return, account and other transcript types available for numerous business returns.
Government-source records become most powerful when they are compared with the documents already in the mortgage file.
The objective is not simply to collect another piece of paper.
It is to determine whether the borrower's stated income, tax returns, W-2s, 1099s and business information tell the same financial story as the records maintained by the IRS.