Selling Guide

Published June 3, 2020

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B3-3.1-06, Requirements and Uses of IRS Request for Transcript of Tax Return Form 4506-T (07/03/2019)

Introduction

This topic contains information on the use of IRS Request for Transcript of Tax Return (IRS Form 4506-T), including:

 

Use of IRS Form 4506-T to Validate Borrower Income Documentation

Fannie Mae requires lenders to have each borrower whose income (regardless of income source) is used to qualify for the loan to complete and sign a separate IRS Form 4506-T at or before closing. (As noted below in Completing and Submitting the IRS Authorization Form, it may be necessary to have the borrower complete and sign multiple IRS Form 4506-Ts depending on the transcripts required to validate the income.)

In addition, the lender must document the requirement to obtain tax transcripts by submitting the IRS Form 4506–T to the IRS (directly or through an authorized designee) in their written quality control (QC) plan. See D1-3-02, Lender Post-Closing Quality Control Review of Approval Conditions, Underwriting Decisions, and Documentation for details concerning QC requirements.

If the lender submits the IRS Form 4506–T to the IRS prior to closing, the transcript(s) must be used to validate the income documentation provided by the borrower and used in the underwriting process. In this case, because the lender has already received the tax transcript(s), an additional signed IRS Form 4506-T is not required to be obtained from the borrower.

When all of a borrower’s income is validated by the DU validation service, the lender is not required to obtain a signed IRS Form 4506–T for that borrower.

 

Use of IRS Forms to Obtain Federal Income Tax Information

When federal income tax information is used to document income for qualifying purposes, the lender may obtain transcripts of the applicable federal income tax documents. For example, the lender may obtain Tax Return Transcripts for Form 1040 or Wage and Income Transcripts for W2s, 1098s, and 1099s. However, 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. For example, the lender must obtain copies of Schedules B through F, Schedule K-1, or business returns. These schedules or forms are not required if:

  • the income reflected on the applicable 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 validated by the DU validation service, lenders are not required to obtain the tax returns. Documentation in accordance with the DU message is acceptable. The DU message may allow a tax transcript rather than the tax returns. See B3-2-02, DU Validation Service, for additional information.

 

Alternatives to the IRS Form 4506-T

Use of IRS Form 4506-T has become the most efficient method for lenders to obtain electronic transcripts of the borrower's income tax information. It is also acceptable for lenders to use either IRS Request for Copy of Tax Return (IRS Form 4506) or IRS Tax Information Authorization (IRS Form 8821); however, these forms are not supported electronically by the IRS. In addition, IRS Short Form Request for Individual Tax Return Transcript (IRS Form 4506T-EZ) is also acceptable, although it may only be used to obtain transcripts of IRS Form 1040 (no other tax forms are supported using IRS Form 4506T-EZ).

 

Note: Borrowers with income from Puerto Rico must use Modelo SC 2907 (Solicitud De Copia De Planilla, Relevo De Herencia Y De Donacion) rather than one of the forms mentioned above. Applicable forms or processes for eligible borrowers filing tax returns in other U.S. territories must be adhered to and obtained when required.

 

 

Completing and Submitting the IRS Authorization Form

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.).

Lenders must

  • fill in as the recipient of the tax documents — either its 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; and

  • date the form(s) with the date on which the borrower signs the form (or ascertain that the borrower dates the form when he or she signs it).

IRS Forms 4506-T and 4506 are valid for 120 days after completion (including signature) by the borrower. IRS Form 8821 is valid for 60 days after completion.

 

Note: The borrower should not be required to sign an IRS authorization form before all items on the form, including the transcript being requested, the years/tax periods, and the date, have been completed.

 

 

Retaining the Tax Documents

All tax documents, including either the IRS Form 4506-T or the tax transcript(s) received from the IRS, and any subsequent explanation or documentation of discrepancies must be retained in the loan file for QC review.

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