Just a hypothetical senerior here, with purely fictional caractors of course…
Say a small time self employed person is considereing buying a house, and has to get approved for a loan. He honestly does make enough, to qualify for a loan for the modest house he’s looking at, and 5 years into business he’s stable enough to keep up with the payments.
The lender is asking to see this persons 1040 tax returns for this year and the previous year. If the person seeking this loan prints up copies of these returns and provides them to the lender, how much comunicating actually goes on between the lender and the IRS? do they start compairing notes?
Replies
if your loan papers don't match what you sent the irs,one of two things.
loan fraud
tax evasion
if you don't report the income,you can't have your cake and eat it too.larry
if a man speaks in the forest,and there's not a woman to hear him,is he still wrong?
I certainly wouldn't advocate either one of those, and I can't think of any buisiness person who would ever even think of doing such a thing to any degree.
But do lenders and the IRS talk to each other?
It doesn't work that way, in my experience. The lender asks the borrower to sign a release, allowing the lender to get your tax returns directly from the IRS. The lender may also ask you to provide copies, and they may only request your filings from the IRS if you get into trouble... but you'll never know.
Yes they do. But not over items in the manner you are discussing to my knowledge.
They can't get your Goat if you don't tell them where it is hidden.
I don't know...but I bet the nicer white collar prisons have internet access.
OK, cool it now, before I start telling prison jokes.
oh oh I know a good one!
you wanna be the husband or the wife?
Oh yeah, that's the first one.
drbgwood,
You are asking for advice which could have legal consquences.
Let me see if I can answer your question without giving you advice..
I suspect that the banks don't verify your IRS forms. It would be illegal for the IRS to give another individual your data.
However I also suspect that if for any reason the loan went into default the first thing that would happen is the bank would look at was fraud committed to obtain the loan. If fraud was committed then they have additional pressure they can apply on you in their attempt to collect..
Bankruptcy is bad but you don't wind up in jail. Fraud can and does land people in jail.
I will say that fraud has occurred on bank loans. I flew to LA with a previous high roller who had fraudulantly stated his income on a loan application and if the auction of his property hadn't reached the levels it did he was going to jail for fraud.
It was bad enough to go home after more than a decade of work with nothing to show for it but to go home after serving time in jail would have been the final straw..
I can't think of the form number at the moment, but a reputable lender will have you sign a particular IRS form that allows the IRS to send a copy of your return, as filed, directly to the lender.
This prevents you from bogusing up a 1040 for a loan application.
Check this out:
http://findarticles.com/p/articles/mi_m0EIN/is_2004_July_21/ai_n6116088/pg_1
Edit:
Your lender will (should, most likely) ask you to sign a Form 4506-T indicating that the transcript should be mailed directly to them. The lender's name and address is indicated in Box 5 of the form.
Edited 4/10/2008 7:55 am ET by TaunTonMacoute
a reputable lender will have you sign a particular IRS form that allows the IRS to send a copy of your return, as filed, directly to the lender.
In the last couple of refi's that we did, the closing attorney disclosed to us that the lender prefers that we don't *date* the form, which is time limited (IIRC the permission to access tax returns is limited to 90 days from the date on the form). The lenders were looking to skirt the law with an unlimited window. There's plenty of sleaze to go around...
Bob
The top line on that form, ALL CAPS I think, sez
"Do not sign this form if it is not filled out completely"
Same warning is repeated about half way down.
It lists which year taxes they are asking for and which schedules too (I think)
Joe H
The bottom line is the IRS can't provide without your perrmission.
However, if they though there might be fraud involved, all bets are off.
It does not pay togive any #'s to your bank that are not accurate.
I bet you have some under the table money you would like to count,
don"t, unless you look good in prison stripes.
There are " no doc" loans available. At least there were before the bankers and mortgage brokers greed helped destroy the building business. They're more expensive than verified income mortgages but may be the only choice.
Late last year, we refinanced our house and our accountant had us sign releases allowing him to send our tax info to the lender. I don't know if the IRS was ever contacted, but the whole process went smoothly.
Reading between the lines of your post, I have to wonder if there may be discrepancies between your actual income and reported income. If that's the situation, you probably want to proceed with great caution.
Probably not unless there is a problem.
Bob's next test date: 12/10/07
I ran a coon hunting club for a while . I ran it much like a business although it was non profit . [actually I had to make a profit to even be non profit and stay there]
I made coffee in a 30 cup coffee maker . [old days yea]
It became necesary to get another coffee maker since I nearly had to be making one while they were drinking one.
That should have been success but wasnt the case. I had set up an honor system of a tin 1 pound coffee can. The idea was to deposit a quarter every time you drank a cup of coffee . Since it didnt take a quarter to pay for the coffee might have been their reason I dont know . If they had paid it I could have paid the electric bill for their use and they would not have missed it . Since I found out that I could not use the honor system I set membership fees much like a golf course and upped fees .
Thats actually a classic little story of what happens in the self employed world paying taxes. In the cases we have today of workers getting badly hurt and needing permanant funds from the goverment , they find their quarters didnt hit the tin cup often enough. The housing story is only the start of it .
To answer the question from my experience , my banker recieves a copy of my tax return every year . My signature is of course on it . If I didnt do that they wouldnt loan me any money. They cant I dont think.
Tim
When you say the banker recieves a copy of your return every year, does he get that from you, or the irs?
From me . Its a condition of a loan for me . I always do it every year. Two banks , two copies.
I dont know if they have the right but I guess they have the right to turn me down if I dont . In my case at least I think its their business .
When you get to thinking about it , its a qualifier to pay it back. The house being worth it is another thing which is also necesary. Takes both.
Of course they have the right.If we put ourselves in their shoes and were the ones doing the lending, we'd be smart to know the financial strength of the borrower too. Bob's next test date: 12/10/07
No one that I've talked to, even a few lenders, has said flat out and definatively "don't do it" as far as maybe showing them a 1040 that might not have quite as many of the legitmate and legal deductions as the one that, uhh, my friend would be sending the IRS. Even if they are asked point blank, it's more like a half muffled "you need to show us your 1040's". However, it still sounds a little chancey to me, especially with all the attention being payed to the mortage industry now, so I'll recomend to my friend that he take the high road on this one.
Advice he's been recently getting, and I'm starting to see some logic in it, is to go ahead and sell his condo, take the equity he's built over the past 10 years and pay GWB's dry cleaning bill. With whatever is left after that, pay off my... woop's - his work truck. This puts his self homeless and broke, but in good standing with irs, dept free and with an improved credit rating. I'm being told that a large down payment for a house isn't nearly as important as not having any existing dept. Part of me's saying it's insane to sell a house and blow the money on taxes and truck payments, but for the mid-level handyman type, it might be the ticket to getting out of a condo and into a house with a nice work shop in the back yard.
Oh yeah... he needs to make more money than ever this year so he can pay even more taxes next year.
Edited 4/12/2008 12:51 am ET by drbgwood
I hope you're trying to be funny.
Nah,... just a small time guy in his first few years into self employment wishing it would have all gone just a little better, but trying to figure out how to make the best of what he's got to work with.
Then my advice to you is gut it out.. Lying to the bank to get a loan is something that the gov. will come down on you, espcially now.
I not saying that at some point in my life I haven't exagerated on a loan app., but with all this subprime mess going on it's not a good idea.
"I feal your pain"
There is nothing a lender can do to, or would want to do, to change the terms of a loan if you are making the payments on time. They can't forclose a loan you are not behind on. They can however forclose a loan where you owe more then the loan amount, but again, if your making on time payments it's not likely.
For collaboration between IRS and lender, I doubt it.
But if you are deducting interest that is not in line with your income, flags will be raised. These are very easy ratios to determine.
Something you'll be discussing with your cellmate, no doubt.
I hadn't broke any law's yet.
I like the "yet" part....
Life is not a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside, thoroughly used up, totally worn out, and loudly proclaiming<!----><!----><!---->
WOW!!! What a Ride!Forget the primal scream, just ROAR!!!
Yet we're still discussing it.
In all seriousness, even if they aren't certain or likely to discover it now, if you somehow end up defaulting in the future, or if the loan somehow comes into question... well, your housing costs will go way, way down.
way down, like free?.. cool.
I hear ya. I'd pretty much made the decision earlier today, (as indicated in my previous post) to do an especially acuarate job this year getting caught up with uncle sam... maybe not pushing the deductions quite as hard as I might have done if all this had not come to mind, but I'm certainly not implying paying more taxes than I'm suposed to this year just to make myself look better for a loan. I've made enough to survive comfortably on in the past year, but was I able to set aside as much as I should have for this tax time? - not really. Thats where selling the condo, paying a little more tax than I was hoping to get by with and paying off the truck starts making sense... Just cleaning the slate to have a better shot at getting the kind of home I'd like a few more months down the road.
... They're going to send me to prison for that?
Edited 4/12/2008 2:43 am ET by drbgwood
Let your CPA figure out how to lower that bill legally. Bob's next test date: 12/10/07
It sounded more like you were saying that your taxes show less income than you have because you have reported less income than you have made. And that now you are considering doctoring up a fake return to show more income than you claimed to the IRS. And wondering if doing so would get you caught.
It sounds like now you're talking about something else. You mention not having set aside enough for tax time. I would think someone in your position should be paying taxes quarterly. In any event, if you're considering filing a return that is signifcantly different than returns you've filed in previous years in which you didn't report all of your income, you are in dire need of professional tax advice. And not merely an accountant. You need to speak to a tax attorney who can advise you regarding potential criminal implications. If you have convesations with an accountant, there is no privilege and he can be forced to testify against you. There is an absolute privilege with an attorney.
Is this the dumbest thread in the history of this forum? Or was there another winner?
I'm pretty sure I'm not the only self employeed guy out here with these concerns.
I did make more this past year than the year before, and that year was much better than the year before that- this comming year will be better than the one just past. The house fell in and out of forcloseure a few years ago, the bankrupsey is over and done with and the power hasn't been cut off in quite some time now, and I don't have to hide my truck from the repo man anymore. It's finally starting to become a good living instead of just a way to survive, but who ever said a buisness rarley makes much money in it's first few years wasn't kidding... it's been a painful trip at times.
But it has been mainly a cash buisiness... enough said about that. Talking to a tax attorney, and a CPA sound like a good idea. I think I can afford them now. I'll look into it.
> It's finally starting to become a good living instead of just a way to survive<
Probably time to take a real close look at your business and overhead too, to figure your true costs of business. Be sure to remember to include taxes in your overhead. Problems with cash only is that most folks have no clue of how much they actually make, pay out or what it costs to really run the business, as long as there was a cash flow they thought they were doing good business.
Edited 4/13/2008 9:37 am ET by john7g
Got ya. I'm definatly going to be talking to a cpa very soon about the whole thing.
I appriciate the advice from all those more experienced than I on this stuff.
Good plan.
It doesn't sound like you've had much idea of how much after-tax income you've actually been making. Ask the CPA to set up a program you can understand.
PAHS Designer/Builder- Bury it!
It sounds like now you're talking about something else. You mention not having set aside enough for tax time. I would think someone in your position should be paying taxes quarterly. In any event, if you're considering filing a return that is signifcantly different than returns you've filed in previous years in which you didn't report all of your income, you are in dire need of professional tax advice. And not merely an accountant. You need to speak to a tax attorney who can advise you regarding potential criminal implications. If you have convesations with an accountant, there is no privilege and he can be forced to testify against you. There is an absolute privilege with an attorney.
Excellent advice for our hypothetical friend.
Sell your condo that you've been in for 10 years? And you're afraid of the taxes due on that?
What taxes?
Methinks you're so afraid of taxes that you've become mentally paralyzed.
The biggest financial errors I've ever made were because I didn't want to pay taxes on the profits. The markets took those profits away - very fast. And my concern about paying the taxes.
Call a CPA, ask for an appointment after April 28, and put every little thing you own or owe on the table and tell him what you wanna do. Ask him how you can do it without going to jail.
do you wanna be the husband or the wife?
A recent article in the Wall Street Journal regarding the Mortgage meltdown, lenders do (usually) have you sign a permit to allow the IRS to let them see your tax returns.
The problem is / was that in their greed, less than 5% of the time did lendors actually do this. They claimed it "slowed down" the process, even tho the IRS / Bankers association said it usually took less than 2 days for the IRS to respond.
See, the lenders made their money in 2 ways, 1) the fees they charged for the mortgage and 2) the money they made when they sold that mortgage to the investment houses.
They couldn't care less if you couldn't keep up the payments. If/when you defaulted, it was someone else's problem.
Thos mortgages were bundled into "securities that were then sold to and held by the large securities firms (Bear Stearns etc). And sold to the public. (Let's hear it for "deregulation", huh?!) Buyers thought "hey, those are mortgage backed securities! They're pretty safe! BULL! It was a scam!
As many of us know, we make our mortgage payments to somebody who we never heard of when we purchased our original mortgage. I got my orig mortgage from a local bank 10 years ago and am now sending my payments to CitiCorp??
With today's environment, you can bet lenders are a bit more careful in checking your IRS returns.
Edited 4/12/2008 10:08 am ET by rwjiudice
If you think, for a moment, in this time of mortgage meltdown, that lenders are not going to verify everything, you're nuts. It may take time .... but, six months into making payments, you're likely to find yourself foreclosed upon- as well as other negative consequences.
Lenders are not stupid. Absent W-2 forms, they'll most likely want a CPA to audit your books. Keeping two sets of books? I hope you like wearing stripes.
With government guaranteeing so many loans, it's also very possible that your real tax info will come to light eventually.
Hear you loud and clear sir.
Admitidly there was a big tempation to maybe skew some information a little when I stumbled on a deal of a lifetime a few weeks ago to get a house out in the country at a really good price that had a pond in the front yard, and a nice sized workshop in the back... my dog would have loved it there, and so would have my cabinet making tools.
After kicking all this around with ya'll, it's turned into a wake-up call to get with a professional asap and get any accounting errors I might been making straited out.
They'll be other oportunities for houses down the road.
Don't toss the baby out with the bath water.
If you have good credit, you could still get that great deal. Everyone is warning that you shouldn't fudge your information and I agree but that doesn't rule out you getting a loan.
Most of the information regarding the need for documentation is geared toward the national lending institutions and their fannie mae and freddie mac requirements. But, they aren't the only ones lending money these days despite the roar of the sub prime market.
There are subprime loans being given...yes even today! If you look hard enough, you probably could find a no doc loan too although I can't say that with certainty if you are only thinking of asking banks for loans.
Don't overlook the small local banks. They know the market and they'll know that property. If it's truly a good deal and you have good credit, they can make a "portfolio" loan. Those are loans that don't get sold on the after market and don't need to follow the "normal" lending rules.
Also, you might be able to get the seller to carry the loan. That is probably far easier than you might think and far more common in tough buyer's markets. I myself made a deal to sell some of my property to a guy who moved into our property on a "zero down" deal. Yes it's a risk, but so far, he's making his payments...
Don't lie on your docs though. Just tell the truth and let the chips fall where they lay.
Bob's next test date: 12/10/07
thanks. I'll look into those options too... soon as I get some other "issues" staitened out. He might become interested in ower financing. I think he's actually a builder in the area with some deep pockets, and this place was just some kind of little side project for him.
I think theres a good chance it might sit there a while longer while I do what I need to do to get my ducks back in a row. The places main attraction to me might just be the same thing that's going to make it hard to sell to the average joe home-shopper, and that's having an 1800 sq ft shop in the back yard. I'll just do what I've got to do, and with some luck, maybe it'll work out.
can you get owner financing of the property?
edit- I see Jim already suggested.
Edited 4/13/2008 9:51 pm ET by john7g
I forgot to mention....
Our accountant in MI told Frank that the banks have sold him building lots for as low as 10k in subdivisions where they used to sell for 100k! Bob's next test date: 12/10/07
Speaking of lenders....
The lenders in MI are now in the process of taking over a lot of failed construction projects including lots of spec homes and lots and such. One of their tactics is to let the houses sit past the one year anniversary which expires all the liens if the construction guys don't perfect them. Most won't. The lenders end up with houses built for almost nothing!
Bob's next test date: 12/10/07