Do Mortgage Companies Verify Tax Returns With The IRS?

When applying for a mortgage, lenders will require you to provide documentation to verify your income, assets, and other financial information. One of the most common documents requested is federal income tax returns. This raises the question – do mortgage companies verify tax returns with the IRS?

The short answer is yes, mortgage lenders can and often do verify the tax return information provided by borrowers directly with the IRS. However, recent policy changes have limited lenders’ ability to access borrowers’ tax return data directly from the IRS.

How Mortgage Lenders Verify Tax Returns

There are a few different ways mortgage lenders can verify tax return information:

• Asking the IRS for tax return transcripts—Until recently, lenders could quickly get tax return transcripts for borrowers through the IRS’s Income Verification Express Service (IVES). This let lenders check the borrower’s income and other information directly with the IRS.

• Requesting tax returns directly from borrowers – Lenders can ask borrowers to provide a copy of their tax returns, usually for the last 1-2 years. The lender will review the returns to verify income and other details.

• Using third-party tax verification services – Some lenders utilize third-party services that borrowers can authorize to collect tax data from the IRS and provide it to the lender. This allows lenders to verify tax return information without directly accessing IRS systems

IRS Policy Changes Limiting Lender Access

In recent years, the IRS has implemented policy changes that limit lenders’ ability to directly access borrowers’ tax return information:

• June 2019 – The IRS stopped allowing lenders to share tax return data with third parties. This impacted lenders’ ability to sell loans on the secondary market.

• January 2024: The IRS said that starting June 30, 2024, they will only send mortgage lenders tax return transcripts through IVES. For other types of loans, like auto, student, small business, etc., transcripts will no longer be given out.

• May 2024 – The IRS required all IVES participants to re-apply for access by May 1, 2024 and state that IVES will only be used for mortgage lending.

These changes mean lenders can no longer verify tax returns directly with the IRS for many common lending situations outside of mortgages.

How Policy Changes Impact Mortgage Lending

The IRS policy changes primarily impact mortgage lenders in two ways:

• Slower loan processing – Without direct access to tax return data, lenders rely on borrowers to provide tax returns. This can slow down underwriting as lenders wait for borrowers to supply returns.

• More responsibility on lenders—Lenders must now do more to make sure that the tax returns that borrowers give them are correct, since they can’t check directly with the IRS. This increases lender workload.

However, the core ability for mortgage lenders to verify tax returns with the IRS remains intact, just with some additional frictions.

Alternatives for Lenders Verifying Tax Returns

Given the IRS policy changes, mortgage lenders are utilizing alternatives to verify tax return information:

• Getting transcripts before approval—Lenders ask for transcripts up front when borrowers are pre-approved, before the new rules go into effect on June 30, 2024. This verifies income before loans are finalized.

• Using third-party tax verification services – More lenders are turning to third-party services that can securely obtain transcripts from the IRS with borrower authorization.

• Asking CPAs for return copies – Lenders may ask borrowers to have their CPA provide copies of tax returns directly to the lender to verify authenticity.

• Scrutinizing borrower-provided returns – Reviewing returns from borrowers closely, looking for any red flags or inconsistencies that may be signs of inaccurate information.

• Comparing returns to other income documentation – Reviewing tax returns side-by-side with paystubs, W-2s, and bank statements to cross-verify income.

The Bottom Line

While lenders’ direct access to tax return data from the IRS is being limited, mortgage lenders still have the core capability to verify tax returns provided by borrowers. However, the process now requires more time and responsibility on the lender’s part. As lenders adapt, tax return verification will likely remain a staple requirement of the mortgage application process.