If you have gone through the refinance or purchase process in the past couple of years, you would have undoubtedly seen (and signed) the IRS 4506-T form at least two times, sometimes more.
The 4506-T gives the lender authorization to request a copy of your tax return transcripts directly from the IRS. The transcript is a shortened version of your tax returns, and the purpose of receiving it is to match up the income you filed with what you claim on your application and income proof you provide.
This is usually not a problem, but there are some instances where it can cause last minute hiccups. For instance:
- If you are salaried and provided paystubs and W2s but not tax returns: If you have but did not disclose any 2106 expenses (“unreimbursed business expenses”), Schedule C (“Profit or Loss from Business”) or Schedule E (“Supplemental Income and Loss, i.e. from rental properties, royalties or partnerships), this is going to show up on the audit and the lender will question why you did not disclose it, and then your qualifying ratio will have to be rerun according to the new information.
- If you are self-employed or incorporated and tax returns were provided: If you file your returns with the IRS and the income is needed or used for qualifying, the lender must be able to verify it with the transcript. The IRS can often take many weeks to log in your filed returns, so this can potentially delay a closing. This is pertinent if you need the most recent returns’ income for qualifying purposes.
The 4506-t has been around for many years. In the past (prior to the credit crunch), some lenders would ask for it to be signed, but not all. They usually did not go as far as actually requesting the transcript from the IRS though; they only had it on hand and would audit one out of many hundreds of loan applications. Now they are diligent about auditing income, no matter how golden the loan package may be. As a result, mortgage fraud based on income has decreased substantially.
