A Lender’s Guide to Amended Tax Returns Published July 10, 2024

Accessing federal tax returns is crucial for evaluating a potential borrower’s creditworthiness; however, complications may arise if the borrower has made amendments to these returns. For lenders, the key to navigating this complexity is understanding how amended returns impact tax return transcripts and have the potential to complicate the overall financial assessment of a borrower. Our experts break down the critical aspects lenders need to know about amended returns to ensure smoother and more accurate loan processing.

Understanding Amended Federal Tax Returns 

An amended tax return is filed to correct errors or omissions on an originally filed return. Common reasons your borrower may file an amended return include:

When the IRS processes an original tax return, it creates a transcript that summarizes the return’s information. Lenders often use this transcript to verify a borrower’s income and tax status. But here’s the kicker: once this original transcript is created, it does not get updated with the information from an amended return. 

A Challenge for Lenders

As lenders review tax return transcripts as part of their due diligence process, amended returns can create issues when it comes to assessing a business’s health. Most commonly, this appears in the form of mismatched information and zeroed-out transcripts. Let’s dig in:  

  • Mismatched information: As previously mentioned, the original tax return transcript will not reflect any changes made in an amended return. This can lead to discrepancies between what the borrower presents and what the IRS transcript shows.
  • Zeroed-Out transcripts: Due to a system quirk, the IRS might zero out information on the original transcript when an amendment is filed, leaving lenders with transcripts showing all zeros for crucial financial data.

This means that as lenders like you review borrower tax data, you may encounter a transcript that does not match the financial information provided by the borrower. This can lead to confusion for both borrowers and lenders alike and has the potential to create funding delays.  

How to deal with amended returns

The good news is there are methods to handle these complex scenarios.

Your best bet is to turn to another document in your arsenal – the Record of Account Transcript. We recommend requesting a Record of Account Transcript when processing a loan application, especially if there is any indication that an amended return may have been filed.

Unlike the standard federal tax return transcript, a Record of Account Transcript includes all transactional data between the IRS and the taxpayer. This transcript will show changes resulting from any amendments, providing a more complete financial picture. 

 It’s also important to establish clear procedures for handling cases where there is a discrepancy between the original and amended returns. You should verify the authenticity of amended returns and understand their implications for the borrower’s financial standing. As needed, you should also keep a lookout for news from the IRS and guidance shared in its annual reports, like Publication 17, which can offer timely updates to policies related to amended returns. This will help you make informed decisions and advise borrowers accurately.

Finally, educating borrowers upfront on the importance of transparency regarding any amendments to their returns may save you both time and result in a smoother funding process.

We’re here to help! 

Amended federal tax returns add a layer of complexity to the lending process, but with the right knowledge and tools, lenders like you can navigate these challenges effectively. To avoid potential pitfalls, we recommend staying informed, communicating openly with borrowers, and verifying with comprehensive Record of Account transcripts.

Our team of tax experts is here to help. As a partner in your success, we’re ready to help you navigate the complexities of amended returns and ensure a seamless lending process.

Posted By: Alex LeRoy

As a Senior Manager of Customer Success, Alex and his team work with a wide range of Tax Guard's customers to help reduce risk, speed up closing times, and align Tax Guard's services with each lender's unique strategic initiatives. Prior to joining Tax Guard, Alex focused on revenue growth and customer retention for various mid-sized businesses. He has deep experience cultivating relationships and building strong partnerships. Alex holds a MBA from Regis University, and a B.A. in History from Colorado State University. In his spare time he enjoys reading, playing golf and basketball, and spending time with his wife Allie and their two sons.