The Tale of IRS Form
4506-C vs. IRS Form 8821 for Tax Return Transcripts
Published November 15, 2022
As a lender, do you know what really happens when you file a tax return transcript request with the IRS for one of your borrowers? It’s quite an adventure. The IRS isn’t exactly on the cutting edge of hi-tech—in fact, with their substantial need for red pens, which allow clerks to circle line items on paper returns to transcribe by hand, they’re practically operating in 1974.
Let’s take a walk through the various processes and compare how lenders and the IRS deal with the Form 4506-C vs. Form 8821 for tax return transcripts to see which one has the optimal results.
What is IRS Form 4506-C?
In one way, IRS Form 4506-C, also known as the “IVES Request for Transcript of Tax Return,” does a lot for lenders by simply allowing them to verify a potential borrower’s income and prevent fraud. But sometimes, simple isn’t enough—and if you’ve had firsthand experience working with the Form 4506-C, you’re probably more than familiar with the shortcomings of the process. It’s frustrating to go through the time-consuming process of requesting tax return transcripts, only to receive an outright rejection of your request without explanation.
The IRS isn’t trying to annoy you, they just take disclosing borrower data seriously. For this reason, transcript requests through Form 4506-C are subjected to a 30%-40% rejection rate due to common, easily overlooked mistakes such as, omission of tax year information, or missing information such as the borrower’s address, mailbox number, or TIN. When Form 4506-C is rejected, the IRS doesn’t include recommendations for how to resubmit the form successfully—meaning, rejections (and each subsequent order for the same borrower) will cost you your valuable time and resources.
Even once you’ve got your hands on them, tax transcripts alone are only a partial indicator of a business’s financial health. Form 4506-C provides access to specific information regarding borrower-requested tax years and forms, so lenders don’t get a complete portrait of a potential borrower’s financial situation (particularly if the borrower in question is a small business). Thin credit files lead to difficult underwriting decisions and are correlated with higher than average credit risks. All the while, small businesses need funding more than ever. To meet their needs, lenders must be able to lend with increased confidence.
Questions about your tax transcript request?
The IRS is still woefully understaffed and lacks comprehensive customer service that could aid lenders and their partners. And because the IRS has yet to begin substantial modernization efforts, it’ll remain an unreliable and frustrating experience for lenders requesting tax return transcripts with the Form 4506-C for years to come. Expect to wait at least two weeks and up to sixty days to receive the information you need—if you’re ordering multiple transcripts, they’ll most likely arrive one by one and in no particular order.
What is IRS Form 8821?
IRS Form 8821, also known as the “Tax Information Authorization” form, isn’t just another way for tax professionals to request a copy of a potential borrower’s tax return transcripts. This form makes it easy to request information from multiple tax forms at once, including 1120, 1120-S, 1065, 1040, 940, and 941 returns and allows third-party access to a unique, in-depth look at federal tax compliance over the past ten years or more.
An important note: while Form 8821 authorizes a third party to gather information about a tax account, it’s different from power of attorney (granted by Form 2848) in that it doesn’t allow a third party to speak on behalf of a taxpayer. It is merely an authorization to receive information.
Access to federal tax data via Form 8821 enables lenders to perform a deep dive into a wealth of information, including payment and cash flow history, that act as strong indicators of a business’s overall financial health. Did you know that the IRS only officially files federal tax liens 80% of the time a business has tax debt? Form 8821 allows you to locate hidden tax debts even when the IRS has fallen behind on filing public tax liens.
Form 8821 includes other crucial tax compliance information not contained in standard tax return transcript services such as missing return filing status, and payment agreement compliance information; as well as, payroll tax deposit records. While payroll tax deposits are typically made 8-13 times per quarter, research reveals the most compliant businesses choose to pay payroll taxes bi-weekly. With post-funding monitoring of tax compliance data, you’ll be the first to know when a business misses a payroll tax deposit deadline and could be beginning to spiral into financial duress.
Only federal tax data, such as payroll tax compliance data offered by Form 8821, gives lenders real-time access to clear indicators of financial well-being. This data allows lenders to make better, data-based decisions regarding which borrowers are more likely to repay a loan.
Tax Guard found that one lender could have expanded their portfolio size by 20% by approving low-risk applications that were unnecessarily rejected. By declining the 10% of loans with the highest risk profile, the lender could have reduced credit losses by almost 60%.
Save time with Tax Guard and Form 8821
With Form 8821, you can get the information you need when you need it—just indicate whether you’d like your tax transcript and federal tax data delivered in four hours or ten days. A far more straightforward request form than Form 4506-C, Tax Guard’s use of this form and intuitive process has a rejection rate of only 5% and no rejection costs. And if you do receive a rejection, you’ll be provided clear feedback on why your request was rejected so you can resubmit confidently.
Why wait to speed up your lending and improve your credit risk processes? With Tax Guard and Form 8821, you’ll benefit from the assistance of a customer success manager assigned to optimize your account. Credit risk management may be an evolving and tricky process, but it’s also crucial to the well-being of lenders and businesses alike. That’s why we specialize in working with lenders and pride ourselves on being particularly attuned to the interconnected needs of small businesses and their funding partners.