On Jan. 7, the Internal Revenue Service (IRS) began accepting electronic signatures for its 4506-T tax transcript request form. This is a significant advancement toward the “e-mortgage” and removes the impediment of a “wet signature” requirement on the 4506-T. The e-signature will lead to rising consumer satisfaction and mortgage processing efficiencies, while significantly advancing the protection of consumer information.
To submit digitally signed 4506-Ts as a participant in the IRS Income Verification Express Services (IVES) program, lenders, third-party vendors and others will need to adopt a series of procedures intended to protect borrower information and meet the IRS’ standards for data integrity, authentication and so forth. These procedures are not complicated, but will require significant effort, and depending on how they are implemented, they could be rather costly. For this reason, it is at least prudent for lenders to consider partnering with an experienced IVES provider.
Fannie Mae, Freddie Mac and other entities in the secondary market want lenders to know whether a borrower is being truthful about their income, and the current process of verifying this information with the IRS has caused significant inefficiencies in origination workflow due to the wet signature required on the 4506-T.
Based on the resounding success of an e-signature pilot the IRS conducted between July 2011 and March 2012, it is easy to predict that this endeavor will be a huge hit, albeit with a slow but steady adoption rate for the mortgage industry and beyond. During the pilot, the IRS rejected only three out of the 5,000 4506-T documents that were submitted for review.
For those already employing e-signature technology for other disclosure documents in a mortgage file, adding a digitally signed 4506-T will not be difficult. These companies will simply add the form to the queue of documents digitally signed in the signing room.
However, the IRS has designated the following five essential requirements for entities participating directly in the IVES program without employing a third party:
- The electronic signature must be under the sole control of the consumer in a password-based system;
- The e-signature must be verifiable in real time through e-signature technology that uses algorithms or forensic analysis of the signature’s measurements and dynamics;
- The e-signature must be unique to the individual borrower;
- The e-signature must establish the borrower’s intent to be bound to the transaction, and the borrower must be fully aware of the purpose of the e-signature; and
- The e-signature must be tamper-proof through industry-standard encryption.
But wait, there’s more!
For the most part, the IRS requirements are broad in scope and are written with the intent that the IVES participant has practical experience with the process of digitally signing and archiving documents. In practice, a borrower will provide authentication by clicking through a series of instructions on their computer screen in order to electronically sign the 4506-T form. This should happen within a secure, electronic vault provided by the lender or verification provider. However, consumers also must be given the option to opt out of an e-signature and provide a wet signature on a paper form that is faxed to the IRS.
The IRS is serious about maintaining the security and integrity of the program and their data, and is extremely conservative when releasing taxpayer information. In addition to the above requirements, to participate in the e-signature program, you must put together a quality review plan, create a log for each electronic signature and conduct a monthly independent audit of electronic signatures that will be turned in to the IRS annually. The first audits are due on Jan. 31, 2014.
The quality review plan requires IVES participants, whether they are a lender or a third-party verification provider, to save a sampling of 125 e-signatures monthly for review to make sure they are in compliance. Participants must develop a skip interval for collecting sample signatures by dividing the total number of monthly e-signatures by the sample size of 125.
Once 125 e-signatures have been collected, the process can be stopped. For those participants with less than 125 in a month, all e-signatures must be collected for the sample for the compliance review process.
IVES participants also must create an audit log of all e-signatures and maintain it for a period of two years. The log must include the date and time of each e-signature, the IP address of the signer, evidence of the authenticity of the signature and the consent of the signer. A third party, such as a certified public accountant or law firm, must conduct a monthly audit of the IVES participants’ IRS e-signatures.
For the IRS e-signature program to get off to a fast start, IVES participants will need to confirm that all of these procedures are in place: quality control skip interval plans, audit firms and a process flow plan that separates the electronically signed IRS forms from the paper-based forms. IVES participants also should prepare for random site visits and quality review document requests by the IRS. Yes, the IRS might actually visit you.
A lender utilizing a third-party solution provider for 4506-T processing reduces their exposure to regulatory risk as the Consumer Financial Protection Bureau deepens its regulatory reach into mortgage lending.
Additionally, processing 4506-Ts is not easy. It is not a system-to-system transaction but, rather, a manual paper process for the IRS. From inventory management to integrations with loan origination systems to the systems that would need to be developed to interface with the IRS’ back-end system for transcript delivery, there is a cost of investing in software. Plus, there is the human resources investment in the process. As a result, some lenders may want to consider investigating the possibility of partnering with a verification provider in regard to this endeavor.
Benjamin Franklin once remarked that the only things certain in life are death and taxes. When it comes to the 4506-T process, having advance knowledge of how the process works will enable lenders to avoid problems with the IRS - a situation that many people consider to be a fate worse than death!s
E-Signatures And The IRS: What You Need To Know
By Curtis Knuth
Electronic income verifications require audits, reviews and more.
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