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YOUR MORTGAGE

IRS to Cross-Check Borrowers by E-Mail

November 03, 1996|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — 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 also expose borrowers to federal tax audits to boot.

A prototype e-mail program linking IRS tax databases with participating mortgage lenders is scheduled to get underway 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 also to sign authorizations 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, say lenders, the same applicants report lower income figures.

"Who knows what their real incomes are?" asked 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"--either the IRS or the lender--"the truth about their income."

The new e-mail cross-check concept grew out of an ongoing two-year "compliance study" of mortgage applicants conducted by the IRS in California. In that program, participating lenders fax 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 fax, 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. Under the ongoing compliance study, participating lenders must sign a "memorandum of understanding" with the IRS. That agreement requires them to send the IRS the "complete copies of the tax returns submitted with the loan application whenever there is a difference of $10,000 or more" between income shown on copies of tax returns submitted with the application and the reported incomes on file with the government.

Armed with the tax returns passed on by the lender, the IRS is then free to go after the loan applicant via an audit. A copy of the memorandum of understanding obtained by this reporter states that the purpose of the ongoing compliance project is to assist in identifying "potentially fraudulent loan applications, and to detect and deter the use of false copies of income tax returns to obtain credit. . . ." Participating lenders are limited to FDIC-insured banks and mortgage companies approved to do business with Fannie Mae, Freddie Mac or the federal Department of Housing and Urban Development.

The ongoing program already has triggered "hundreds of IRS audits," according to the California Society of Enrolled Agents, a group that assists taxpayers with tax planning and representation.

IRS spokeswoman Jodi Patterson said the new prototype e-mail version of the program will involve "no faxes, no paper" and no upfront disclosures by the lender about the incomes reported by borrowers on their applications. The IRS will simply transmit the applicants' adjusted gross incomes from its database for the years requested, Patterson said. However, with the ease of electronic communication, you can bet that one day the IRS might start asking lenders to provide copies of selected applicants' tax returns.

The ongoing compliance cross-check study of mortgage applicants has raised the hackles of some tax professionals who feel that self-employed borrowers are being trapped into audits by the IRS and mortgage lenders. Lenders, on the other hand, have this response: Don't lie about your income on your loan application and you won't get in hot water with either us or the IRS.

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Distributed by the Washington Post Writers Group.

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