By: Timothy A. Raty, Sr. Regulatory Compliance Specialist
In the Beginning…
Since 2018, the Internal Revenue Service (“IRS”) has taken steps to mitigate the chances of taxpayers’ personal information from being used by identify thieves. The IRS began by partially masking such information on tax transcripts and, starting June 28, 2019 discontinued faxing services for most transcripts to both taxpayers and third parties (see https://www.irs.gov/individuals/about-the-new-tax-transcript-faqs).
On July 1, 2019 the IRS discontinued certain third-party mailing services in which IRS Forms 4506, 4506-T, and 4506-T-EZ were used and such forms were amended to remove the option for tax transcripts to be mailed to a third-party (see https://www.irs.gov/newsroom/irs-takes-additional-steps-to-protect-taxpayer-data-plans-to-end-faxing-and-third-party-mailings-of-certain-tax-transcripts). This considerably impacted the mortgage industry, since copies of these transcripts needed to be sent to a third party (e.g., brokers and lenders) to verify the income of the borrowers. The IRS, however, advised the following:
“Third parties who use these forms for income verification have other alternatives. The IRS offers an Income Verification Express Service (IVES) which has several hundred participants, who, with proper authorization, order transcripts. Lenders or higher education institutions can either contract with existing IVES participants or become IVES participants themselves. The tax transcript is an official IRS record. Taxpayers may choose to provide transcripts to requestors instead of authorizing the third party to request these transcripts from the IRS on their behalf.”
Curiously, no mention was made in either of these announcements about the IRS’ plans to create a new Form 4506-C, to be used in connection with IVES. The first mention of this form to the general public was in the Federal Register on July 24, 2019 when the Department of the Treasury issued its 60-day Notice and request for public comments, a necessary part of the process in submitting the document to the Office of Management & Budget (“OMB”) for approval. A brief overview was given by the Department:
“Previously the Form 4506-T (or 4506-TEZ-OMB number 1545-2154) was used by both the Return and Income Verification system (RAIVS) respondents and IVES Income Verification Express Service (IVES) respondents to order a tax transcript. In effort [sic] to protect taxpayer information, IRS implemented a policy change for the Form 4506 series to no longer mail tax transcripts to third parties that have not been vetted through the agency and as a result eliminating line 5a from Form 4506-T.
Since the IVES customer base are third party clients that are fully vetted to receive Taxpayer transcripts, and could no longer use Form 4506-T, IRS implemented a separate f4506-C to service this customer base. The new 4506-C will permit the cleared and vetted IVES clients to request tax return information on the behalf of the authorizing taxpayer.” (84 FR 35709 )
Written comments on the new form were required to be received by the IRS on or before September 23, 2019. The Department again referenced Form 4506-C in its 30-Day Notice on December 19, 2019, which required comments to be received on or before January 21, 2020 (see 84 FR 69824 ).
A related curiosity which occurred during these early days is that the IRS published a revised version of Form 4506-T in June 2019, but refused to accept this version through IVES. The IRS informed IVES participants (but not the general public) that the March 2019-version of Form 4506-T was to be used for IVES, thus leading to two different versions of the forms being used at the same time (see https://compliance.docutech.com/2019/07/08/document-updates-postponement-of-irs-form-4506-t-update/ for further details). An IRS IRM Procedural Update dated July 26, 2019 provided the following information:
“All Form 4506 series requests must have an acceptable revision date in order to process.
1. Effective July 1, 2019 RAIVS requests on Form 4506-T or Form 4506T-EZ must have a revision date of 6-2019 or later. Requests on Form 4506 must have a revision date of 9-2018 or later.
2. IVES requests on Form 4506-T or Form 4506T-EZ must have a revision date of 9-2018 or 3-2019. IVES requests on Form 4506-C must have a revision date of 6-2019 [this, despite the fact that Form 4506-C had not as yet been submitted to the OMB for approval].”
The reasons for this are outlined in the IRS’ “Supporting Statement A” of the information submitted by the IRS to (and received on February 27, 2020 by) the Office of Information and Regulatory Affairs (“OIRA”) for OMB approval – which information included Form 4506-C (see (see https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201908-1545-007). The “Supporting Statement” also provides additional insights into Form 4506-C. Some of the more relevant parts of this Statement are as follows:
“. . . While waiting for OMB approval, IVES participants can use the 3-2019 version of Form 4506-T to obtain enough lead time to communicate the changes to their clients/customers. In the 6-2019 revision, Form 4506-T revision, Line 5a is eliminated, and IVES needs line 5a to request the information of the third party. The IRS would like the Form 4506-C to be available to the public to mitigate any future confusion as to what revision of the form to use. . . .
[A commenter] followed up by email with; [sic] IVES requires use of the March 2019 version until new Form 4506-C is released. Can you confirm that RAIVS is requiring the newer June 2019 version, or did the effective date of the policy change get extended?
IRS responded by email with; [sic] RAIVS requires the new version of Form 4506-T (06-2019) . . .
26 USC 6103(c) permits the taxpayer to request the disclosure of tax records to designated parties. In effort [sic] to securely protect taxpayer information, a policy change was implemented for the Form 4506 series which no longer permits the mailing of tax returns to third parties that have not been vetted through the agency. . .
The IRS policy change is in effect August 2019. While waiting for OMB approval, IVES participants can use the 3-2019 version of Form 4506-T to obtain enough lead time to communicate the changes to their clients/customers.
In order to continue to support the established IVES program the IRS requires the implementation of a separate form 4506-C. Form 4506-C has been created to support the need of the IVES client base, an existing clientele with security approval. Form 4506-C will permit the cleared and vetted IVES clients to request tax return information on the behalf of the authorizing taxpayer.”
As has been typical throughout most of this process, the IRS never made any announcement to the general public about new Form 4506-C, including its approval by the OMB in March 2020 and its publication on the IRS’ website in September/October 2020 (see https://compliance.docutech.com/2020/10/20/compliance-news-new-irs-form-4506-c/). The IRS does not even have its own page for Form 4506-C, unlike its counterparts (see https://www.irs.gov/forms-pubs/about-form-4506).
From what we have been told from partners, the IRS currently permits either the use of this form or the March 2019-version of Form 4506-T through IVES. However, starting March 1, 2021, only Form 4506-C may be used through IVES; the June 2019-version of Form 4506-T will continue to be used in connection with RAIVS.
While the timeframes in which Form 4506-C may be accepted by the IRS are clear, when this form will be acceptable to some investors and Federal agencies as a replacement for Form 4506-T is not. Currently, the Federal National Mortgage Association (“FNMA” or “Fannie Mae”), Federal Housing Administration (“FHA”), and the Office of Rural Development (“RD”) specifically require certain IRS forms to be used for the loans either purchased or insured/guaranteed by them – with no leeway permitting new Form 4506-C to be used in lieu of such forms:
“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. . . .
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).” (FNMA 2020 Selling Guide B3-3.1-06)
“Direct verification of the Borrower’s employment history for the previous two years is not required if all of the following conditions are met: . . .
The Borrower executes IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-T, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two tax years.” (FHA Single Family Handbook 4000.1 II.A.b.[ii][C])
“IRS transcripts are required for all required household members in addition to the documentation option selected by the lender. Lenders must require each adult household member as applicable to complete and sign IRS Form 4506-T for the previous two tax years at the time of loan application. The 4506-T must request full transcripts with all schedules.” (RD HB-1-3555 ch. 9.3[E]; emphasis in the original)
In contrast, the requirements of both the Federal Home Mortgage Loan Corporation (“FHLMC”) and Department of Veteran’s Affairs (“VA”) provide enough flexibility to permit Form 4506-C to be used immediately:
“All Borrowers, whose income is used to qualify or whose assets are used as a basis for repayment of obligations in accordance with the requirements in Section 5307.1, are required to sign Internal Revenue Service (IRS) Form 4506-T (or an alternative form acceptable to the IRS that authorizes the release of comparable tax information). The Form 4506-T must be signed no later than the Note Date.” (FHLMC Single-Family Seller/Servicer Guide § 5302.5)
“IRS Form 4506-T. VA guidelines for standard and alternative documentation do not include a requirement to obtain IRS Form 4506-T. This applies to both W-2 earners and self-employed borrowers. The VA Lender’s Handbook references IRS Form 4506-T in Chapter 4, Topic 8, Documentation for Automated Underwriting Cases (AUS). The IRS Form 4506-T requirement is sometimes listed as a condition on the AUS feedback certificate or imposed during a manual underwrite by the lender. It is important to note that even if this condition exists, it would be considered an investor or lender overlay exceeding the guidelines established by VA.” (VA Circ. 26-20-19)
In an email sent on November 10, 2020 FNMA announced that they would be updating their Selling Guide in December 2020 to align its requirements with those of the IRS’ for IVES (see https://compliance.docutech.com/2020/10/20/compliance-news-new-irs-form-4506-c/). However, no official word has been promulgated by either FHA or RD as to when they will be amending their requirements to accommodate Form 4506-C. Please note that this is a matter of “when” and not “if”, since the IRS does mandate that Form 4506-C must be used with IVES and the only practical way lenders can request a borrower’s tax transcript is through IVES.
We have confirmed that all of our clients are using the March 2019-version of Form 4506-T, thus indicating that all of our clients are using IVES. Our hope, then, is to completely replace our standard copies of Form 4506-T with Form 4506-C (using the same document codes and settings).
However, due to the lack of guidance from three of the five top investors and Federally-backed mortgage insurers/guarantors as to when they will accept Form 4506-C, we have delayed creating Form 4506-C for a bit, hoping these entities will provide clarification soon and to avoid any potential for loans to be rejected by these entities, because Form 4506-T was not used.
We do understand that there are other investors who will begin requiring Form 4506-C sooner than March 1, 2021. We are therefore planning to incorporate Form 4506-C into our current copies of Form 4506-T and allowing either form to print based on a switch. Further details will be provided in the future, but we plan on having this in Production by January 1, 2021 – with an adequate testing period beforehand.