As of March 1, 2023, the IRS changed from a manual ordering process to Optical Character Recognition (OCR), along with clean form requirements for the 4506-C. This modernization will improve efficiency; however, lenders may need to review and update their internal processes for collecting information on this form.
Many requests for tax return transcripts are rejected due to avoidable errors on the 4506-C. Below is a list of items that if not completed correctly may result in an order rejection.
· Ensure the version of the 4506-C form is the October 2022 revision.
· Compare the address(es) shown for the borrower on the 4506-C to the IRS documents included in the loan file for accuracy.
· 5a must not be blank.
· 5d must list the client’s information.
· Line 6 should only list the tax form number that was filed. Listing multiple tax forms will result in a rejection.
· Mark the checkbox on line 7 for Wage and Income transcripts from a W2 or 1099.
· Only list the year(s) that match the IRS documentation included in the loan file. All years listed will be ordered and result in additional charges.
· The signatory box must be checked.
· If the form is electronically signed, the box stating, “Signatory confirms document was electronically signed” must be checked.
· Strikethroughs, circles, and arrows are not allowed even if initialed by the taxpayer.
Lenders are required 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-C at or before closing. The only exception is when the borrower’s income has been validated by the AUS.
Fannie Mae and Freddie Mac require lenders to submit the 4506-C to the IRS for all loans reviewed as part of their Post-Closing quality control plan. Exceptions include when transcripts are obtained during underwriting, or when the borrower’s income is validated by the AUS. Reverification of borrower’s income and Employment Information.
Review internal processes and make checking the 4506-C for errors a part of your approval process!
For more information from the IRS, including frequently asked questions, click here.
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