Tax Transcripts/4506-T Policy External

Overview

loanDepot Wholesale (LDW) requires a fully executed IRS Form 4506-T for each borrower on the loan.  

Execution of the 4506-T Form

At the time of the loan application and at/or prior to closing for full doc/credit qualifying loans, a separate IRS Form 4506-T must be completed and signed by each borrower for each type of transcript required; for example, one IRS Form 4506-T for personal returns (1040) and another for business returns (1065, 1120s, etc.).

Note:Non-credit qualifying FHA Streamlines and VA IRRRLs will require a fully executed IRS Form 4506-T at time of closing only. LDW will not require a 4506-T form at time of application.

If LDW executes Form 4506-T with the IRS prior to closing, the transcripts received must be used to validate the income documentation used in the underwriting process.

IRS Form 4506-T can be used to obtain transcripts for up to four years or tax periods but only one tax form number can be requested per each IRS Form 4506-T. For example, it is necessary to complete two IRS Form 4506-Ts for a self-employed borrower whose income documentation includes both two years of personal tax returns and two years of business tax returns. One IRS Form 4506-T will be required to obtain a transcript of the personal 1040 returns and another will be required for the business returns (Form 1065, Form 1120, Form 1120A, etc.).

Required IRS Transcripts

LDW may submit the Form 4506-T to the IRS in order to document borrower income, but the intent of this policy is to validate the income documentation used in the underwriting process. LDW must obtain Tax Return Transcripts for Form 1040, 1040A or 1040EZ or Wage and Income Transcripts for W2s, 1098s, and 1099s. Nevertheless, in certain instances, copies of the actual returns, schedules, or forms are needed because the tax return transcripts will not provide the detail required to qualify the borrower. Copies of Schedules B through F, Schedule K-1, Form 2106, or business returns are required if applicable.

When tax returns are required to support qualifying income, LDW requires the tax transcripts ONLY under the following circumstances:

·       Handwritten Tax Returns

·       Amended Tax Returns

·       Wage earner employed by family member

·       Agency or Investor specific program requirements

o   See individual program guides for additional requirements

·       At the discretion of an Underwriting Manager or their proxy

If LDW’s business units execute Form 4506-T prior to closing, the transcripts received MUST be used to validate the income documentation used in the underwriting process.

What Is Available

The IRS provides a line-by-line transcript of the information it has received for up to the past four tax years. Transcripts available through submission of IRS Form 4506-T includes the following series:

Reviewing the Results

The execution of the IRS Form 4506-T with the IRS can be a tool to document borrower income, but the intent of this policy is to use the form to validate the income documentation provided by the borrower and used in the underwriting process.

The information on the Borrower provided documents should match exactly the information provided by the IRS.  Differences for rounding purposes are acceptable.

There are some instances, however, in which a variation between the income documentation (paystubs, W-2s, etc.) and the IRS tax return transcript is acceptable. The underwriter (UW) must review the transcript information to determine the reasons for any income discrepancies (e.g., borrower provided his/her 2016 W-2, but the IRS only had 2015 W-2 transcript information available). If the discrepancies cannot be explained by information already in the loan file, the UW must obtain additional information to satisfactorily address any and all inconsistencies.

AUS Requirements

Documentation in accordance with DU or LPA message is acceptable. In some cases, the AUS may require 1 year tax returns instead of 2 years.

Tax Return Requirements

Federal tax returns are not required to verify income for a significant number of income types including salary/base pay, bonus and overtime, or for commission earnings that amount to less than 25% of total qualifying income. Tax returns are also not required for military income, social security, disability, or retirement income except when tax returns are provided to evidence the non-taxable income portion for grossed-up factors.

LDW requires that federal income tax returns be provided when one or more of the following income sources are being used to qualify:

In these cases, the tax returns provide the UW with a more comprehensive view of the borrower’s income, and enable identification of any related expenses that may need to be factored into the income calculation.

The “most recent year’s” tax return is defined as the last return scheduled to have been filed with the IRS. For example,

 

If Today’s Date is....

Then the Most Recent Year’s Tax Return would be...

February 15, 2019

2017

April 15, 2019

2018

December 15, 2019

2018

 

The following table describes which tax-related documentation to obtain depending on the application date and disbursement date of the mortgage loan.

 

Application Date

Disbursement Date

Documentation Required

October 151 [current year minus 1] to April 142, current year

October 151 [current year minus 1] to April 142, current year

The most recent year’s tax return is required. The use of a Tax Extension (IRS Form 4868) is not permitted.

April 151, current year to June 30, current year

The previous year’s tax return (the return due in April of the current year) is recommended, but not required.

LDW must ask whether the borrower has completed and filed his/her return with the IRS for the previous year. If the answer is yes, LDW must obtain copies of that return. If the answer is no, LDW must obtain copies of tax returns for prior two years.

LDW must only obtain completed and signed IRS Form 4506–T for transcripts of tax returns provided by the borrower to LDW. (LDW is not required to file IRS Form 4506–T for tax returns not provided by the borrower.)

July 1, current year to October 142, current year

The loan file must include the most recent year’s tax return, OR all of the following:

  • A copy of IRS Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) filed with the IRS,

  • LDW must review the total tax liability reported on IRS Form 4868 and compare it with the borrower’s tax liability from the previous two years as a measure of income source stability and continuance. An estimated tax liability that is inconsistent with previous years may make it necessary for the lender to require the current returns in order to proceed.

  • IRS Form 4506–T transcripts confirming “No Transcripts Available” for the applicable tax year, and

  • Returns for the prior two years

April 151, current year to October 142, current year

April 151, current year to December 31, current year

January 1, [current year plus 1] to April 142, [current year plus 1]

The most recent year’s tax return is required. The use of a Tax Extension (IRS Form 4868) is not permitted.

1. Or the April/October filing dates for the year in question as published by the IRS.

2. Or the day prior to the April/October filing dates for the year in question as published by the IRS.

Inconsistencies and Red Flags

The UW will carefully review the loan transaction and take prudent measures to investigate red flags that may indicate the presence of fraud or potential identity theft scenarios.

At times, we may encounter difficulties in obtaining IRS tax transcripts, such as:

Keep in mind that Code 10 is a potential indicator of fraud or identity theft, and the appropriate level of prudence in confirming borrower identity when a Code 10 has been returned by the IRS should be exercised.

See Also

4506T Rejection Notice

Business Tax Returns

Signed Tax Return Policy

 

 

V.E. 02.20.2019