IRS Form 4506-T Tips for Underwriting and Quality Control

IRS Form 4506-T Tips for Underwriting and Quality Control
February 2015
This document provides tips for lenders regarding use of the Request for Transcript of Tax
Return (IRS Form 4506-T), including what information is available, what to request from the
IRS, and how to review the results when underwriting a borrower for a mortgage loan or
conducting a quality control (QC) review. For related information, refer to the Borrower
Income Verification Policies FAQs.
Use of the IRS Form 4506-T
Fannie Mae’s policy regarding use of the IRS Form 4506-T to validate borrower income documentation for
underwriting and QC purposes requires the lender to
 have each borrower (regardless of income source) complete and sign a separate IRS Form 4506-T
for each type of transcript required at or before closing (for example, one IRS Form 4506-T to be
completed and signed for personal returns and another for business returns), and
 add the execution of IRS Form 4506-T with the IRS (directly or through an authorized vendor) to its
written QC plan. Refer to the Selling Guide, Subpart D1, Lender QC Process, for details about
lender QC requirements.
Fannie Mae does not require lenders to execute the IRS Form 4506-T with the IRS prior to closing. As part of
post-closing QC, however, for all loans reviewed through the random selection process (and for loans selected
through the discretionary selection process, as applicable) the post-closing QC review must include the
lender's execution of the IRS Form 4506-T with the IRS (or designee). (See Reviewing the Results below for
additional information.) Given that IRS Form 4506-T is valid for only 120 days after completion and signature
by the borrower, lenders should take that into consideration when deciding at what time in the process to
obtain the borrower execution of the form.
NOTE:
Lenders that obtain the appropriate IRS transcripts during their pre-closing process (processing and
underwriting) may use the same documents in their QC process without ordering new transcripts.
What Is Available
Use of IRS Form 4506-T has become the most efficient method for lenders to obtain a borrower’s income tax
information – the information is available electronically and quickly. In response to submission of an IRS Form
4506-T, 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 include the following series:
 1040: U.S. Individual Income Tax Return
 1065: U.S. Return of Partnership Income
 W-2: Wage & Tax Statement
 1098: Mortgage Interest/Student Loan Interest/Tuition Statements
 1099: Dividends/Interest, Miscellaneous Income, Government Payments, Cancellation of Debt, etc.
 1120: U.S. Corporation Income Tax Return (also 1120-L and 1120-S)
 5498: IRA, HSA, Archer MSA, Medicare Advantage MSA, Coverdell ESA Contributions
© 2015 Fannie Mae. Trademarks of Fannie Mae.
February 2015
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NOTE:
Request for Copy of Tax Return (IRS Form 4506) and Tax Information Authorization (IRS Form
8821) are also acceptable; however at this time, the tax information available using these forms is not
available electronically. In addition, the eligible timeframes for the forms differ – Forms 4506-T and 4506 are
valid for 120 days after execution by the borrower, but Form 8821 is valid for only 60 days after execution by
the borrower.
What to Request from the IRS
The table below shows the documentation that should be requested when using IRS Form 4506-T. The
requested documentation must follow Fannie Mae’s income documentation requirements, which depend on the
type of borrower income (self-employed, salaried, commissioned, etc.) and the underwriting method (Desktop
Underwriter® [DU®] or manual).
If Standard/DU Income
Documentation Option Is …
(as determined by the Selling
Guide or the DU
Recommendation)
YTD Paystub and One W-2
The IRS Form 4506-T request must include most recent filing of …
1040 (4506T-EZ
may also be
used)
1120 or 1065
1099
W-2
1 year
YTD Paystub and Two W-2s
2 years
YTD Income Information and
Two 1099s/1040s
2 years
One Year Personal Returns
1 year
Two Years Personal Returns
2 years
Two Years Personal Returns and
Two Years Business Returns
2 years
2 years
2 years
Examples
 When manually underwriting a salaried borrower, the lender should request two years of W-2s*.
• January 2015 initial request to the IRS – 2012 and 2013 W-2s.
• August 2015 initial request to the IRS – 2013 and 2014 W-2s.
 When underwriting a salaried borrower through DU, DU may only require a recent paystub and
one year’s W-2. In this case, the lender should request the most recent available W-2*.
• January 2015 initial request to the IRS – 2013 W-2.
• August 2015 initial request to the IRS – 2014 W-2.
 When underwriting a self-employed borrower (DU or manually), the lender should request two
years of individual federal tax returns. In this case, the lender should request the most recent two
years of available tax returns*.
• January 2015 request to the IRS – 2012 and 2013 Form 1040s.
• August 2015 request to the IRS – 2013 and 2014 Form 1040s.
NOTE:
* When requesting this information, lenders must take into consideration the documentation delays.
It typically takes the IRS 6 to 8 weeks to add new filings or corrections to its database.
© 2015 Fannie Mae. Trademarks of Fannie Mae.
February 2015
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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.
If the documentation used to support the borrower’s income (e.g., 2014 W-2 for Borrower 1 from Employer A)
is the same year as the information available from the IRS (e.g., 2014 W-2 transcript for Borrower 1 from
Employer A), the information must match exactly (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 following questions may assist in determining whether the differences between the income documentation
and IRS tax return transcripts are reasonable or if additional documentation is needed:
 Did the borrower file a joint return but is on the loan application alone?
 Did the borrower change jobs? Is he/she in the same line of work but with a different company?
 Did the borrower receive a promotion?
 Did the borrower’s compensation structure change (e.g., from base to commission or from salary to
hourly)?
 In the previous year(s), did the borrower receive bonus or overtime compensation that is no longer offered?
 Is the borrower now receiving bonus or overtime compensation that was not offered previously?
 Did the borrower not have enough income to require the filing of a federal tax return (e.g., 2014 single filer
with income less than $10,150)?
 Is there undisclosed self-employment loss for a co-borrower or non-borrowing spouse?
The lender must review the transcript information to determine the reasons for any income discrepancies (e.g.,
borrower provided his/her 2014 W-2, but the IRS only had 2013 W-2 transcript information available). If the
discrepancies cannot be explained by information already in the loan file, the lender must obtain additional
information to satisfactorily address any and all inconsistencies.
© 2015 Fannie Mae. Trademarks of Fannie Mae.
February 2015
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