B3-3.1-06, Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C
IRS Form 4506-C is a tool that people, who are allowed to use IRS Income Verification Express Service (IVES), can use to get tax transcripts electronically. This is only allowed if the taxpayer gives their permission.
Use of IRS Form 4506-C to Validate Borrower Income Documentation
If a lender is using a borrower’s income to qualify them for a loan, Fannie Mae says that the borrower needs to fill out and sign a separate IRS Form 4506-C. This needs to be done at, or before, closing. If there’s a different form or process that allows the release of similar tax information from the IRS, that’s also acceptable.
Let’s say, for example, you’re a borrower who makes money from a few different sources. You might need to fill out and sign more than one IRS Form 4506-C. This depends on the transcripts needed to confirm your income.
It’s important to note that if you’re a borrower whose income comes from Puerto Rico, you’ll need to use a different form, Modelo SC 2907, instead of IRS Form 4506-C. If you’re an eligible borrower filing tax returns in other U.S. territories, you’ll need to use the correct forms or processes and get them when required.
The lender also needs to document that they’re required to get tax transcripts. They can do this by submitting the IRS Form 4506–C to the IRS. They can either do this directly or through an authorized designee. This needs to be included in their written quality control (QC) plan. For more information, you can refer to “D1-3-02, Lender Post-Closing Quality Control Review of Approval Conditions, Underwriting Decisions, and Documentation.”
If the lender sends the IRS Form 4506–C to the IRS before closing, they must use the transcript(s) to confirm the income information provided by the borrower. If the lender already has the tax transcript(s), the borrower doesn’t need to sign an additional IRS Form 4506-C.
If all of a borrower’s income is confirmed by the DU validation service, the lender doesn’t need to get a signed IRS Form 4506–C for that borrower.
Use of IRS Forms to Obtain Federal Income Tax Information
If the lender is using federal income tax information to document income, they can get transcripts of the relevant federal income tax documents. For example, they might get Tax Return Transcripts for Form 1040 or Wage and Income Transcripts for W2s, 1098s, and 1099s.
But sometimes, they will need copies of the actual returns, schedules, or forms. This is because the tax return transcripts might not provide enough detail to qualify the borrower. For example, they might need to get copies of Schedules B through F, Schedule K-1, or business returns. These are not needed if the income on the schedule transcripts is positive, and the income supported by that schedule or form is not being used for qualifying.
If a borrower’s self-employment income from a sole proprietorship (as reported on IRS Form 1040, Schedule C or C-EZ) is confirmed by the DU validation service, lenders don’t need to get the tax returns. Documentation that aligns with the DU message is acceptable. The DU message might allow a tax transcript instead of the tax returns. For more details, refer to “B3-2-02, DU Validation Service.”
Completing and Submitting the IRS Authorization Form
You can use IRS Form 4506-C to get transcripts for up to four years or tax periods. But, you can only request one tax form number per each IRS Form 4506-C.
For example, let’s say you’re a self-employed borrower. Your income documentation includes two years of personal tax returns and two years of business tax returns. You’ll need to fill out two IRS Form 4506-Cs. One IRS Form 4506-C will be needed to get a transcript of the personal 1040 returns and another for the business returns (Form 1065, Form 1120, Form 1120A, etc.).
When filling out the form, lenders must:
– Write in the recipient of the tax documents. This could be their name or the name of the servicer, if servicing will be transferred within 120 days of the taxpayer signing the form.
– Indicate that the request is for documentation concerning the year or years for which the borrower’s income was or will be used in underwriting the loan.
– Date the form(s) with the date on which the borrower signs the form.
Keep in mind that IRS Form 4506-C is only valid for 120 days after the borrower completes it by signing it.
The borrower should not be asked to sign an IRS authorization form before all items on the form have been completed. This includes the transcript being requested, the years/tax periods, and the date.
Retaining the Tax Documents
Lenders must keep all tax documents. This includes the IRS Form 4506-C or the tax transcript(s) received from the IRS, and any explanation or documentation of discrepancies. These must be kept in the loan file for QC review.
References
For more details, visit Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C of the Fannie Mae Selling Guide.