5 Common Issues Obtaining Transcripts from the IRS – And How Lenders Can Avoid Them Published December 17, 2024

Obtaining transcripts can be one of the most challenging hurdles in the due diligence process. Issues can surface for a variety of reasons, some of which are easily prevented. To avoid unnecessary delays and complications in the loan approval process, lenders should familiarize themselves with these common pitfalls.

Here are five common reasons why financial verification of a borrower’s information can hit roadblocks:

1. No Record of Return Found

One of the most common problems lenders face when trying to obtain tax transcripts from the IRS is receiving a “No Record of Return Found” message.

We’ve heard from many of our customers that they receive a “No Record of Return Found” message after submitting a request for transcripts. When a return is filed electronically, the taxpayer or their CPA immediately receives an “acceptance” notification from the IRS. This leads the taxpayer to believe the IRS has reviewed the return, accepted the information, and completed processing. Unfortunately, this only indicates an acknowledgment from the IRS that the electronically filed return was received.

If tax return transcripts are requested before the return has been fully accepted and filed, it will result in a “No Record of Return Found” message. On average, the IRS takes four to six weeks to process and approve electronically filed returns. So, if the acceptance date matches the submission date, it’s likely that the return is still in the early stages of processing, which could explain why the transcript request returned no record.

Our recommendation for lenders is to compare the date the return was submitted with the “acceptance” date. If these are not at least 4 weeks apart, you are likely seeing an electronic submission acknowledgment and not an indication that the return has been processed.

2. Incorrect Tax Form Filed

Another major cause of transcript issues is the filing of incorrect tax forms.

For instance, a business might try and file their taxes as an S Corporation without receiving proper authorization from the IRS ahead of time. An S Corporation is a specific type of business structure that combines elements of a corporation and a partnership, usually for a tax benefit. Businesses from law firms to hair salons can be designated S Corps, but if a business files as such without receiving proper authorization from the IRS ahead of time, their tax return may not be recognized. This can also lead to a “No Record of Return Found” status, frustrating both the lender and borrower.

Even if a business believes they’re eligible to be treated as an S Corp, they can’t start filing the 1120-S (the return filed by S Corps) and assume that the IRS will begin viewing them as one. To avoid this pitfall, lenders should be aware of this distinction and ensure that their borrowers are filing correctly and only after their S Corporation status has been authorized by the IRS.

3. Amended Returns

Amended tax returns add a layer of complexity to the lending process. When a borrower files an amended return, the original IRS transcript won’t reflect these changes, which can lead to discrepancies between the borrower’s provided tax returns and the IRS data. Furthermore, if the lender is unaware of the amendment, this can cause significant delays in their lending process, oftentimes resulting in outright rejections. It’s crucial for lenders to inquire about any amended returns upfront in their due diligence process.

We recommend that lenders request a Record of Account (ROA) transcript, which combines both the original and amended return information to ensure access to all borrower information, promoting ease and efficiency.

4. IRS Processing Delays

Delays in IRS processing, particularly with paper-filed or amended returns, can be a significant hurdle. These delays mean that the necessary transcripts may not be available within the timeframe required by the lender, especially for SBA loans. Without these transcripts, lenders might fall out of compliance with SBA requirements, risking loan defaults without the backing of a guarantee.

Understanding these delays and setting realistic expectations with borrowers can help mitigate this risk. We encourage lenders to familiarize themselves with the following processing timelines to calculate proper turnaround times both for their clients, and for their overall due diligence process.

• Electronic returns filed before the deadline will typically be processed in 4-6 weeks.
• Electronic returns filed after the deadline typically take 16 weeks or more to process.
• Amendments and mailed returns can take 16 or more weeks to process.

5. Zeroed-Out Transcripts

Believe it or not, in some cases, an amendment can result in the IRS accidentally zeroing out all the information on the original tax return transcript.

This creates a scenario where the lender receives a transcript that shows all zeros, leading to confusion and potential rejection. This situation is often difficult to resolve, as the original information may be irretrievable, and the information you’re left with may be entirely incomplete or incorrect.

Requesting ROA transcripts can also help here. They provide a more comprehensive view of the taxpayer’s account, including original return information, amended return data, and any IRS adjustments direct from the source. While ROA transcripts may not completely solve the issue of zeroed-out information, they can offer additional context, potentially revealing all or part of the missing data and helping lenders access some of the critical information they need.

Avoid Unnecessary Setbacks

Understanding these issues is crucial for lenders to ensure a smoother transaction and keep the cycle of small business lending healthy and moving. To minimize roadblocks and streamline the lending process, lenders should anticipate and address common issues with IRS transcripts early in their due diligence efforts. Proactively verifying submission dates, ensuring correct tax forms are filed, accounting for amended returns, and factoring in IRS processing timelines can save significant time and reduce frustration for both lenders and borrowers.

At Tax Guard, we specialize in helping lenders navigate these challenges with confidence. Our tools and expertise are designed to simplify the transcript retrieval process, ensuring you have accurate, up-to-date financial data to make informed decisions. If you’re faced with a setback, our world-class customer service team can help you quickly understand and resolve any issues so that you can get back to funding. Schedule a demo to learn more, today!