If you’re a mortgage lender, you’re undoubtedly familiar with IRS Form 4506. Introduced as a fraud prevention measure, Form 4506 is required from nearly every borrower to prove that their tax returns from the past two years are authentic and properly filed. So, when it comes to the IRS Form 4506, keeping up with the most recent changes, and the changes to come, is nothing short of crucial.
The IRS had initially set a deadline of March 1, 2022 to conform to their new 4506-C clean form requirements, but they’ve recently extended the cutoff date to October 1, 2022. Although lenders now have an additional seven months to abide by the updated conditions, several other major changes on the horizon will cause a seismic shift in how lenders and borrowers interact with and submit tax return verification requests.
The IRS Form 4506: Then and Now
Lenders have been using some version of the IRS Form 4506 since its implementation in 1988. Initially, the original 4506 could take up to 60-days for the lender to receive. Back then, the IRS would print out and mail the form to the requestor. Waiting on the IRS to send these full-copy tax returns was far from ideal, both for the lender and the borrower.
The next generation of the IRS form, the 4506-T, replaced the full-copy tax return with a transcript-only requirement. The evolved form’s reasoning was to mask pieces of personal information and reduce wait times by utilizing the Income Verification Express System (IVES). However, the IVES fax-based service still took several days to provide lenders with the information they needed, and the process was far from seamless.
Following the 2018 Taxpayer First Act, Congress directed the IRS to upgrade its income verification system. This upgrade called for fully automated, real-time capability using an application programming interface (API) to make the verification process fast and user-friendly. Nevertheless, the IRS’ initial attempts to update and automate its system didn’t quite align with Congress’ goal to streamline the lending process for small business owners and consumers. In the subsequent years, the IVES system continued to feel outdated. Going offline frequently and requiring significant manual work left lenders feeling frustrated.
While the IRS introduced the new Form 4506-C in 2019, it was 2021 that brought about the long-awaited accountment regarding a step towards modernization. The transition would involve the inclusion of Optical Character Recognition (OCR) software and clean form requirements for the 4506-C.
However, just like the 4506 forms that preceded the 4506-C, requirements and procedures change over time to adapt to the needs of mortgage lenders and their businesses.
To stay current with the new form requirements and to prepare for future changes to the 4506-C, let’s break down the upcoming clean form requirement mandates and look ahead at what’s to come over the next year.
Updated Form 4506-C Requirements
To steer away from manual processes and align with the future of automation, the IRS has begun utilizing Optical Character Recognition (OCR) software. This step into the 21st century will seriously improve efficiency; however, lenders should prepare to update their internal processes for collecting 4506-C forms from borrowers to avoid any slowdowns.
Below are the new process requirements as of October 1, 2022.
Must be a CLEAN typed copy of the 4506-C form.
- Handwriting is unacceptable, except for the Signature and/or Sign Date and/or Title.
- The form cannot be a combo of handwritten and typed.
- No cell phone pictures of the form.
- No reduced size of the form.
One person per form. (If NOT filing joint returns)
- If borrowers did NOT file joint tax returns, you must have a 4506-C for each borrower.
- List primary taxpayer on Line 1.
One Product per form per person.
- Only 1 box can be checked per product per person.
- Multiple boxes cannot be checked on the 4506-C.
The years being requested must be listed on Line 8.
- No additional years should be listed on Line 8.
Updates to processes concerning the IRS are never simple, and compliance has been tricky. What’s more, these won’t be the last changes the IRS is implementing – several large changes will occur between now and the beginning of 2023.
If you’ve tried to get anything done involving the IRS in recent years, you’ve likely encountered at least moderate delays. These slowdowns have been problematic for quite some time, and they haven’t shown any current signs of improvement.
Continued budget cuts, outdated software, and old systems paired with the impact of COVID-19 have only impeded IRS processing speeds further. With service delays including live phone support, paper tax return processing, taxpayer mail correspondence, and electronic tax return review, holdups are trickling down to affect everything from SSA verification to tax services.
It’s no secret to the IRS that it’s time for a transformation. As the federal agency prepares to propel itself into the 21st century, what additional changes can lenders expect to see regarding the future of 4506 submissions?
The Future of Tax Return Verification Through the IRS
To modernize systems and address the delays currently faced by lenders and borrows, the IRS plans to implement the following changes between now and January 2023:
- Form 4506-C replacement
- Discontinuation of faxing service
- New API process implementation
How will these changes impact lenders and borrowers?
The 4506 process revamp is intended to modernize the income verification process, benefiting both the borrower and lender. But as with any learning curve, there are bound to be pros and cons at the outset.
The update will mean that borrowers are no longer required to sign the 4506 form; however, they will have to complete a newly required digital authentication. New requirements may lead to additional delays while the borrower’s complete their verification process. However, the form is generated on demand, and the automation of previously manual processes is expected to reduce turnaround times following form submission.
There are plenty of positives that could come out of implementing the new IRS form changes. Nevertheless, lots of change can lead to lots of confusion. With so many developments on the horizon, lenders and borrowers alike are going to have to adjust in a relatively short timeframe. This means placing serious importance on appropriate LO and borrower education in the months to come.
Preparing for all the new changes to the tax return verification process can seem daunting, especially from an internal process point of view. Though the IRS usually provides several months to comply with changes, early adoption is recommended. Start your planning as early as possible to make for an orderly transition that will benefit both you and your borrowers.
CoreLogic is an industry leader in digital borrower verifications, for more information on digital mortgage borrower solutions, click here.
