Selling Guide

Published April 07, 2021

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Can tax transcripts be used in lieu of tax returns to document income?

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.

For additional information, see B3-3.1-06, Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C.

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