The underwriting process can be filled with unexpected twists and turns impacting borrowers and lenders alike. One prominent example: copies of tax returns provided by clients are not always a reflection of what the IRS has on record. The savviest lenders avoid accepting falsified documents and fraudulent data by working with a trusted vendor to secure income and compliance information directly from the IRS system.
Verifying a borrower’s income with the help of IRS tax return transcripts sounds simple, but unfortunately, the reality is often far more complicated. There’s no shortage of ways the tax filing process can go wrong for businesses. It’s not uncommon for lenders looking to verify a borrower’s tax returns with the IRS to receive a “no record found” notice. This can hold up the loan process, making it particularly difficult for businesses applying for loans to access the working capital they need.
What does the “no record found” message really mean? Let’s take a look at the common pitfalls that can stop a loan in its tracks.
Accounting for Poor Business – CPA Communication
The language that tax technology uses to confirm that a return has been sent to the IRS can be confusing to borrowers. When a CPA sends a return, their software often shows a message that says the return has been “accepted.” That is not the same as a return being reviewed, approved, processed, and filed.
Lenders should remember that once a CPA delivers a client’s return to the IRS electronically, it’ll take four to six weeks at minimum for the return to be processed and approved. The ‘acceptance’ of a return simply confirms that the electronic submission has been transmitted to the IRS. At that point, there’s no guarantee that the return can be filed as-is. If your acceptance date is identical to your submission date on your records, that’s a key indicator that the return might not have been fully processed yet.
When taxpayers mistakenly believe their original return has been approved by the IRS, filing an amendment can trigger the IRS to freeze the tax record, rendering transcripts unavailable altogether.
Often taxpayers don’t realize they are out of compliance with the IRS. Simple errors in communication are often the root of the problem. Because the Internal Revenue Service relies on snail mail for all their correspondence, important notifications are frequently lost in the mail or sent to an outdated address. Some tax transcripts fail to show up because businesses mistake handing over their information to their Certified Public Accountant (CPA) with their return being processed and accepted by the IRS.
Other hiccups include a CPA changing filing months or asking for an extension without the business owner’s knowledge, leaving the business unaware that its information has not been processed. Or when a CPA or taxpayer files the incorrect return type, (such as an 1120-S return for a C-Corp), and instances when the IRS has yet to approve that as a filing election for a taxpayer.
Companies: File as the Entity You Are, Not the Entity You Want to Be
The IRS can only accept your return if you file the appropriate form for your business classification. Even if you believe you’re eligible to be treated as an S-Corp, you can’t start filing the 1120-S (the return filed by S-Corps) and assume that the IRS will begin viewing you as an S-Corp.
You must go through the steps as they are outlined and change your business tax election before filing. There’s a separate approval process that businesses must follow (using Form 2553) to be seen as an S-Corp that’s eligible to use Form 1120-S. You can’t submit Form 2553 and Form 1120-S simultaneously—Form 2553 must be filed separately before Form 1120-S can be filed.
Simply sending the IRS Form 2553 doesn’t automatically mean your tax filing requirement has changed. For a business to change its taxation status, it must receive written confirmation from the IRS that Form 2553 was accepted. The IRS will make it clear when your election change has been approved: you’ll receive a letter in the mail confirming your new tax classification and filing deadline.
Five Takeaways to Help Keep Your Tax Filing Process Hassle-Free
For small businesses, consumers, and lenders to thrive, due diligence has to be taken to ensure the IRS has access to the correct information and has enough time to approve a return before lenders are in the final stretch of approving a loan. The following key tips will help taxpayers avoid the “no record found” challenge:
- “No record found” is just a transcript result—it does not necessarily mean the return was or will be rejected. Understanding that a return hasn’t been processed is valuable insight, even though it’s not the ideal result. It could mean that the IRS never received the return or that the incorrect return was submitted. It could also mean your return is still processing!
- Extensive delays are common, especially following backlogs that built up during the pandemic’s peak. It’s unclear when the IRS will catch up on these delays–at some point, you may need to resubmit and start the process again.
- Taxpayers should seriously consider filing electronically. Submitting returns by mail has a much lower success rate and opens up more avenues for errors that might result in the “no record found” roadblock.
- Save all correspondence from the IRS even if it seems obscure or unnecessary, in case additional documentation is needed from a lender or other financial professional.
- Ensure the IRS has your current address to receive important correspondence from the agency. Similarly, it’s crucial to send forms to the appropriate IRS location. Each state has a dedicated IRS office that can be found by searching for your local IRS office.
When borrowers’ tax information appears incorrect or missing, lenders often need more insight into what went wrong. If a requested tax transcript doesn’t show the information you expected, connect with a resource that can offer you support. Your local IRS office is available to help. Additionally, Tax Guard’s experienced team can quickly access the necessary IRS documents, locate the mistake, and let you know how to correct it.
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