Tax Guru-Ker$tetter Letter
Sunday, March 14, 2004
Privacy And Loan Applications
I received the following email in regard to this article explaining how lenders often require borrowers to sign IRS Form 4506, allowing the lender to obtain personal tax info directly from IRS.
Kerry...Were you aware of form 4506?? I was not even aware this existed...scary as hell. This means the govt has essentially become a partner in coercion to give up privacy rights. Ben
"Case in point: Kathie Street, a mortgage broker in Bellingham, Wash., recently was ordered by a national lender to instruct her loan customers to sign -- but not date -- an IRS Form 4506 as a condition of funding their loan. If the clients refused, the loan would be canceled.
IRS Form 4506 grants lenders access to multiple years of private tax returns for up to 60 days after the borrowers sign and date the form. Widely used in the mortgage industry to combat fraud, the form directs the IRS to provide either full returns or transcripts showing key details of the taxpayers' filings.
The form carries explicit instructions that taxpayers must date and sign it. . By signing, but not dating, Form 4506, mortgage applicants essentially allow unknown persons to date the form and receive up to four years of IRS tax filings, no questions asked. There are no controls over their subsequent use of the income and tax information."
I am well aware of the use of that form by lenders for the past 15 or so years and I have a lot of experience with this matter. It's the lenders' method of verifying that the tax returns provided as part of a loan package are the same ones that were sent in to IRS. It was a reaction to a very real problem, where people were making up dummy tax returns in order to qualify for loans, and later they defaulted on those loans. That kind of thing does still happen nowadays and is even easier for people to do with do-it-yourself software, such as TurboTax. Over the 28 plus years I have been a tax pro, I have had several requests to prepare dummy tax returns for lenders, and I still receive occasional such requests; however not as many as previously, since I chewed out several loan brokers for sending their clients to me for this illegal action.
It is similar to lender verification of tax returns with the preparers. I often receive copies of tax returns that I had prepared from lenders asking me to verify that it was the same as what I had prepared. The only time I can recall it not being correct was about a dozen years ago when a lender sent me a copy of a tax return I had allegedly prepared for a married couple. It had my name as preparer; but when I compared it to my copy of the return I had prepared for that couple, it was very different. Their loan broker had dummied up a tax return, using my name and completely different numbers. To say the least, I was outraged at this and filed complaints with every regulatory board imaginable to nail that loan broker. I also terminated all connection with those clients. To the best of my knowledge, nothing was ever done to that loan broker and the lender didn't call in the loan, which was their right after discovering such false information from the borrowers, my former clients.
While it may seem to be a violation of personal privacy to have borrowers sign Form 4506, I really can't get too worked up about it. With all of the personal financial info we are forced to provide to lenders, as well as the open access they have to our credit histories, the 4506 isn't that dangerous.
I hope this real world perspective on this matter gives you a better understanding of this issue.