Tax Return Verification: What You See Is Not Always What You Get Published September 8, 2016

tax return verification

Is it Real or Just an Illusion?

Illusion is everywhere and while I love David Blaine and magic as a whole, I wouldn’t want my due diligence process for lending money to be part of some magic act.  

This brings us to today’s topic.  Tax returns.  Or rather, tax return verification.  As you know, tax returns have long been part of due diligence and a vital piece in the underwriting process.  Whether vetting a business or individual, for a cash advance, mortgage, or anything in between, validating their financial strength will help prevent loss and reduce default rates.  

Yet, if this is such a critical component, why then do lenders trust their borrower to provide them with accurate documentation?  How do you know it’s right?  How do you know if it’s even real?

The Truth, as You Think You Know It

The lending space seems to be exploding at the seams.  Competition is at an all-time high so lenders may take risks they wouldn’t otherwise take.  The truth is, just because a borrower submits a tax return to you does not necessarily mean they have filed it.  

There is no stamped filed copy unless they go to their local IRS office and that too can be fabricated.  Even if they have, are you getting the filed version or perhaps “Version B”?  In fact, you can produce documents such as 1040 records and/or W-2 records from blank templates available on IRS.gov.  

If that isn’t scary enough, it gets better…actually worse.  Fabricated business and personal tax returns can be purchased on Craigslist for a mere $110.  Need supporting bank statements to go with it?  You too can get those for $95.  Check out Bob Coleman’s Fraud Friday to read more.

Granted, I try not to be cynical and like to have faith in people, but you know what they say about desperate times and assumptions.  The reality is fraud is extremely prevalent today and continues to escalate, and you don’t have to be Houdini to pull it off.  

Just search fbi.gov for “tax return fraud” and read the 7,143 results. In addition to fraudulent tax returns, do you know if your borrower even owns the company?  Sure, they are listed on the articles of incorporation as an office, or a member of the LLC.  They even have access to the bank account statements and the bank password, but does that mean they own the company?  If they do, what percentage do they own?  Do they have rights to request these funds?  How do you really know?  

The only true way to identify the percentage of ownership, at least as registered with the IRS, is by way of the Schedule K-1 filed with their taxes, another easy document to alter.  So again, I ask can customer provided information really be trusted?

Getting Down to Brass Tacks

Now here’s the good news, this can be easily solved.  How you ask?  It’s simple, get the tax return transcripts from the IRS. Anyone who has ever had to deal with the IRS is thinking “Easier said than done.  There is nothing ‘simple’ about dealing with the IRS.”  That is true, but fortunately you have an option.  

Tax Guard can provide you with the last three years of tax return transcripts directly from the IRS, and likely faster than you will get it from your borrower.  Perfect!  That solves everything…but does it?  Tax return validation is only one part of it.  Now you know they filed their taxes, and you have an authentic transcript, but did they pay it?  OK, so you see a line item on their bank statement for the IRS.  What tax form and period were they paying?  Was it for the full amount?  Were they paying an old liability or current tax payments?  More good news, we can answer those questions and more.  

Tax Guard validates information directly with the IRS to provide insight on all outstanding liabilities, if the liability has a final notice of levy, a lien, whether they have an Installment Agreement with the IRS, payment history, and missed returns (could be future liabilities).  

After all, the goal in having a complete due diligence process is to ensure repayment of the loan, having the full picture gets you that much closer.  So the next time you receive tax returns from your borrower ask yourself, is it real or just an illusion?

Rich Porterfield
Posted By: Rich Porterfield

Rich has been in the financial/due diligence industry for the past 16 years. His customers have come to rely on him for his deep lending knowledge and methodical approach to solving customer issues. He also has comprehensive understanding of IRS client issues which allows him to provide alternative funding solutions to his customers, increasing their deal sizes and profitability. When Rich is not on the phone or dazzling a customer, he can be found riding his bicycle, spending time at the beach or walking his dog in Central Park. Originally hailing from San Diego, California, Rich now resides in Manhattan.