02/18/09: Tax Returns Are Not Sacred
By Benny L. Kass
Q: Last week, I went to settlement on my first house The settlement clerk at the title company had me sign a number of papers - most of which I did not understand. However, one document was an IRS Form that appeared to give carte blanche authority to the holder to access my income tax returns. When I questioned why I had to sign this form, I was told "the lender wants it". I was also told not to fill in the date after my signature.
Is it customary in real estate closings to require such a form, and if so, why does the lender want it?
A: When I first started practicing law, homebuyers only had to sign three legal documents when they went to settlement: a promissory note, the deed of trust (the mortgage) and a settlement statement (now called a HUD-1).
Nowadays, every time there is a lawsuit involving mortgage lending, or whenever a regulatory body issues a new rule, lenders add new forms to their arsenal. When buyers go to closing today, in addition to the note and deed of trust, here is a sample of the other documents they have to sign: loan application, authorization to obtain a credit report, driver's license information, certificate that they will personally reside in the house, power of attorney to lender to correct typographical mistakes, proof that they are American citizens, an affidavit that there are no liens or lawsuits pending against them, and an IRS form stating that they do not owe any back taxes and are not subject to "withholding" requirements.
In addition, lenders insist that borrowers sign IRS Form 4506, entitled "Request for Copy of Tax Return". In my opinion, this is the most objectionable documents required at settlement. By signing this form, you are giving a blank check to the holder of the document to have complete access to your Federal Income tax return(s). It is a virtual invitation to pry into what you thought are your private tax returns.
Lenders claim they need this form in case they subsequently discover irregularities, fraud or misrepresentations on the part of their borrowers. If shortly after settlement the borrower stops making the mortgage payments, the lender wants the right to investigate whether the borrower was telling the truth when they applied for the loan. And according to the lending community, reviewing past and future income tax returns will assist them in this determination.
As we all know, mortgage lenders rarely keep the loans they make in their own portfolio. They sell the loans in the secondary mortgage market so that they will have more money to make more loans. This means that any subsequent lender who holds your mortgage document has the right to ask the IRS for copies of your tax returns. This also means that your social security number - which must be listed on Form 4506 - can be found in a file drawer somewhere in the United States (or for that matter if the papers are sold internationally, anywhere in the world.)
Why did your lender ask you not to date the form? According to the instructions that accompany Form 4506, the IRS advises they will reject the request unless it is received within 60 days of the date signed by the taxpayer. Since the lender does not know when it will ask the IRS for a copy of your tax return, they want you to leave the form undated. Presumably, the lender will fill in the date at a later time.
But this is contrary to the clear instructions provided by the IRS on the top of the form:
"Do not sign this form unless all applicable lines have been completed"
"Request may be rejected if the form is incomplete, illegible or any require line was blank at the time of signature."
A careful reading of the form indicates that the holder can request more than one tax year income tax return. If you review this form (which is available on the IRS web site at www.irs.gov) paragraph 7 is entitled "tax year requested", and has blanks for up to 8 tax years. In fact, the IRS specifically states on the form that "if you are requesting more than eight years or periods, you must attach another Form 4506."
The answer to your question is yes; it is customary in the industry that this form is required.
But the bottom line is that if you want that mortgage loan, you have to comply with all of the lender's requirements - reasonable or not.