IRS program to check tax, loan figures

Nation's Housing

November 03, 1996|By Kenneth R. Harney

CONVINCED THAT more than a few home loan applicants fib about their incomes to mortgage lenders, the Internal Revenue Service is developing electronic programs that not only identify who's not telling the truth, but could expose borrowers to federal tax audits to boot.

An IRS spokeswoman, Jodi Patterson, confirmed recently that the agency "hopes to go national" with some version of a prototype e-mail program linking IRS tax databases with participating mortgage lenders. The prototype is scheduled to get under way in the next few months in California, run by the Fresno IRS office.

Under the prototype program, lenders will e-mail authorizations by home loan applicants to the IRS, allowing the agency to quickly e-mail tax data -- typically the applicants' adjusted gross income for one or more years -- back to the lender. Any discrepancies between the income listed on the loan application and the income reported to the federal government will thus be known at the application stage.

Under current industry procedures, most self-employed applicants are not only asked to submit past years' tax returns, but to sign an authorization allowing a lender to cross-check those returns with the IRS.

As a practical matter, only a small percentage of applicants are cross-checked with the IRS -- a paper-intensive, "snail mail" exchange that often takes six to eight weeks.

The prime focus of the new program, according to mortgage experts, is on self-employed borrowers -- professionals and business owners who have a high degree of control over their own compensation levels and maximum flexibility on how much they tell anybody about their incomes.

Such borrowers often prefer "low-doc" mortgage programs that require minimal documentation submissions at application.

Lenders say self-employed borrowers sometimes report high annual incomes to qualify for the maximum size mortgage. On their federal tax filings, however, lenders say, the same applicants report lower income figures.

"Who knows what their real incomes are?" said one West Coast-based mortgage banker.

"I guess only they do. But it's helpful to know that they're not telling at least one of us" -- the IRS or the lender -- "the truth about their income."

The new e-mail cross-check concept grew out of a continuing two-year "compliance study" of mortgage applicants conducted by the IRS in California. In that program, participating lenders fax hTC a signed copy of IRS Form 95-01 to the agency. The form includes boxes for three years' worth of adjusted gross incomes "as shown on copies of income tax returns provided to the lending institution."

Within about two days of receiving the faxed Form 95-01, the IRS fills in the applicants' adjusted gross incomes for the same years from its national computer files, and faxes the form back to the lender.

Pub Date: 11/03/96

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