Key Takeaways
- Different types of IRS transcripts serve diverse purposes in lending, and having an acute awareness of those variances can bolster lending practices, saving both timing and money.
- A tax return is the full financial filing a borrower submits, while a tax transcript is a summarized, IRS‑verified version.
- Lenders use different transcript types to confirm income, filing activity, and IRS account details.
- Form 4506‑C provides a one‑time transcript request through the IRS’s Income Verification Express Service (IVES) and requires strict formatting.
- TOD utilizes Form 8821 due to its lower rejection rates and ability to obtain multiple forms for transcripts for up to three years without repeatedly involving the borrower.
Most lenders are aware of the value of IRS-verified borrower data that is received through tax transcripts. However, different types of transcripts have varied use cases, and having a nuanced awareness of these uses can save lenders both time and money.
What Is the Difference Between a Tax Transcript and a Tax Return?
A tax return provides comprehensive financial data that was filed by a borrower. This document is what individuals submit to the IRS annually to communicate their total income from the year, how much they paid throughout the year, and whether they owe more or are entitled to a refund.
A tax transcript is the summarized version of a tax return. A transcript is obtained by lenders directly from the IRS, eliminating the potential for borrower fraud that a tax return submitted by a borrower poses.
Here are the main types of IRS transcripts that can be obtained, what information each conveys, and how to obtain them:
A tax transcript is the summarized version of a tax return. A transcript is obtained by lenders directly from the IRS, eliminating the potential for borrower fraud that a tax return submitted by a borrower poses.
Here are the main types of IRS transcripts that can be obtained, what information each conveys, and how to obtain them:
1. Tax Return Transcript
What it shows:
Tax return transcripts provide a line-by-line summary of the original tax returns that were filed. These forms include Form 1040, 1065, and 1120 among others.
Why lenders use it:
Lenders will request Tax Return Transcripts from the IRS to confirm the income that borrowers reported on their loan applications. This is a required step for originating SBA loans.
Tax return transcripts provide a line-by-line summary of the original tax returns that were filed. These forms include Form 1040, 1065, and 1120 among others.
Why lenders use it:
Lenders will request Tax Return Transcripts from the IRS to confirm the income that borrowers reported on their loan applications. This is a required step for originating SBA loans.
2. Record of Account Transcript
What it shows:
A record of account transcript provides a more complete picture, combining the information from return transcripts and account transcripts. This can include:
Why lenders use it:
Record of account transcripts are useful if the borrower has amended returns. This transcript type can also show whether the IRS changed anything that would affect income or deductions.
A record of account transcript provides a more complete picture, combining the information from return transcripts and account transcripts. This can include:
- Adjustments made after filing
- Amended return changes
- IRS corrections
- Penalties or assessments
Why lenders use it:
Record of account transcripts are useful if the borrower has amended returns. This transcript type can also show whether the IRS changed anything that would affect income or deductions.
3. Account Transcript
What it shows:
Account transcripts show activity on the borrower’s IRS account, such as:
Why lenders use it:
Account transcripts help confirm actual filing dates as well as verify that the return is processed and not under review or unfiled. TOD uses both the Account Transcripts and Return Transcripts, rather than just the Record of Account. This ensures greater accuracy of information.
Account transcripts show activity on the borrower’s IRS account, such as:
- Payments
- Penalties
- Adjustments
- Filing status confirmation
- Whether the return was filed and processed
- Notices issued to the taxpayer
Why lenders use it:
Account transcripts help confirm actual filing dates as well as verify that the return is processed and not under review or unfiled. TOD uses both the Account Transcripts and Return Transcripts, rather than just the Record of Account. This ensures greater accuracy of information.
4. Wage & Income Transcript
What it shows:
Wage & income transcripts show IRS‑collected income documents from employers and payers. This includes information on W-2s, 1099s, 1098s, and other third-party income documents.
Why lenders use it:
Wage & income transcripts help to verify employee and contractor income. These transcripts help lenders reconstruct income if the borrower lost documents, and they’re useful when borrowers under-report or “forget” certain income sources.
Wage & income transcripts show IRS‑collected income documents from employers and payers. This includes information on W-2s, 1099s, 1098s, and other third-party income documents.
Why lenders use it:
Wage & income transcripts help to verify employee and contractor income. These transcripts help lenders reconstruct income if the borrower lost documents, and they’re useful when borrowers under-report or “forget” certain income sources.
5. Verification of Non-Filing Letter (VNF)
What it shows:
A verification of non-filing letter from the IRS confirms that a taxpayer did not file a tax return for that year.
Why lenders use it:
A VNF confirms non‑filing for borrowers who were not required to file. This is particularly common for students, low‑income borrowers, or spouses on joint loans. VNFs are rarely used in business lending and are more common in mortgage lending.
A verification of non-filing letter from the IRS confirms that a taxpayer did not file a tax return for that year.
Why lenders use it:
A VNF confirms non‑filing for borrowers who were not required to file. This is particularly common for students, low‑income borrowers, or spouses on joint loans. VNFs are rarely used in business lending and are more common in mortgage lending.
How Lenders Obtain These Transcripts
IRS Form 4506-C is commonly used by lenders to obtain copies of each type of transcript listed above. It is crucial to note that Form 4506-C is only a one-time transcript request.
Further, this request form is limited to the IRS’s Income Verification Express Service (IVES). Through IVES, gaining any borrower information can take days, and Form 4506-C must follow very specific formatting. If formatting is not followed meticulously, the request could be denied and the individual submitting the access request will have to start the process over.
Through TOD’s platform, lenders can receive a borrower signature on Form 8821 in order to gain ongoing access to the necessary IRS data on that borrower without any further involvement of the borrower for at least 3 years.
This form gives lenders access to more types of IRS information than they can receive through Form 4506-C. This includes:
The borrower can either provide a wet signature or an e-signature through the TOD portal to simplify the process.
Once lenders have gained access to the borrower’s IRS data, TOD’s ongoing monitoring keeps lenders in the loop on any changes to the borrower’s filing status or financial standing.
Should lenders lose access to the borrower’s information for any reason, TOD notifies the lender immediately.
Further, this request form is limited to the IRS’s Income Verification Express Service (IVES). Through IVES, gaining any borrower information can take days, and Form 4506-C must follow very specific formatting. If formatting is not followed meticulously, the request could be denied and the individual submitting the access request will have to start the process over.
Through TOD’s platform, lenders can receive a borrower signature on Form 8821 in order to gain ongoing access to the necessary IRS data on that borrower without any further involvement of the borrower for at least 3 years.
This form gives lenders access to more types of IRS information than they can receive through Form 4506-C. This includes:
- Notices
- Penalties
- Account issues
- Installment agreements
- Tax compliance problems
- Historical filing details
The borrower can either provide a wet signature or an e-signature through the TOD portal to simplify the process.
Once lenders have gained access to the borrower’s IRS data, TOD’s ongoing monitoring keeps lenders in the loop on any changes to the borrower’s filing status or financial standing.
Should lenders lose access to the borrower’s information for any reason, TOD notifies the lender immediately.
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