Sorry for such a long post but details are critical
Need some guidance regarding my friends situation. He will loose his deposit and all loan fee paid if he did not get this loan approved = 2K (loan fee non-refundable amount) and 8k home deposit (if he could not get loan from any other lender due to this issue)
1. John bought a property in 2016 as a primary residence and lived in it for 5-6 months and then had to rent it out due to job change.
2. He is using the same lender now to buy a second home. He disclosed the same info about #1 to the same lender through which he is securing his second home loan - vacation home . His CPA when filing his 2016 returns did a mistake by not including the stuff on Schedule E such as "type of property" , property address, fair rental vs personal use days and simply entered Property as OTHER and declared some other nominal expenses and HOA fee etc.
3. Underwriter now comes back with questions regarding why the items listed in #2 above (property type,address,fair rental etc.) in bold were not listed while filing taxes? Underwriter asks - why is mortgage interest rate appearing on Schedule A? Why is all this info missing from federal tax return?
4. Mortgage guy calls John and says : WE NEED Signed and dated letter from CPA addressing the questions about Schedule E and items listed under #2 and #3 above in bold?
5. John calls CPA and CPA refuses to provide any letter saying lenders are crazy these days and she cannot risk her license being revoked and cannot provide any letters. What she does is : Writes an email saying: John, you have an old copy and attached is final one as our software did not pick up info.
6. John forwards that attachment and email to mortgage guy and also writes (CPA advised John to write this email) that: Since i lived in the Property for approx. 6 months, the mortgage is shown as itemized deduction rather than bifurcating into two - as 1098 mortgage interest statement is only 1 for IRS purpose.
7. Mortgage guy after a week comes back and says:
Would you be able to email me the final, corrected copy of the 2016 Federal Income Tax return? We received the email reply from your CPA last week stating he emailed you the final copy (it looks like the CPA added some of the missing information on the old copy). I can then submit the updated return and the CPA’s email explanation to the underwriter for review.
NOW in this scenario- what should john do? Problem is the updated copy provided by CPA has $2500 extra listed under rental income section - it includes now the property address, type and fair vs rental days, but due to the additional $2500 being mentioned as rental income - this has screwed up the total income of John.
John signed 4506-T with bank last month and its clearly visible there that the new copy provided by CPA does not match with what was filed with IRS - the $2500 difference is obvious as it also impacts the federal tax returns received by $450 and state returns by $150 meaning (as per original tax returns filed by CPA - john received $450 more federal and $150 more state tax returns).
The rental income on IRS tax transcript of 2016 clearly shows the $2500 difference. CPA just added this money now in the edited version of return and made John send it to the mortgage guy.
1. What option does john have now - stick with whatever copy CPA provided and say it is the final one that was submitted to IRS and mention the same to underwriter?
2. When underwriter comes back and says - sorry, your returns do not match with what was filed as per 4506-T? Explain?
3. CPA has denied giving any letter of explanation as of why she originally missed filing info about rental stuff on schedule E. CPA says i cannot risk my license for the $500 fee you pay me to file your taxes - very rude and unprofessional
4. AS FAR AS THE RULES are concerned: Lender legally cannot ask or force john to apply for amending his returns with IRS.
5. John has explained the same rental income discrepancy issue to CPA - but CPA is not helping and not interested at all.
how does JOHN get this loan approved from this lender? Is a $2500 difference such a big deal in the eyes of lender? Because of Cpa's stupidity - john is stuck.
1. How did this screw up the income? Because it differs from the tax transcripts? If anything, it sounds like it adds more income and as long as the return is amended, I don't know why that would be an issue.
2. 4506T - is a tax transcript form that the lender uses to order tax transcripts (a version of your tax returns that comes straight from the IRS). The use this to match it against the "filed" return your friend gave the lender.
3. She could be completely in the wrong or maybe she is saying the returns were filed the way the client wanted her to and she doesn't want to lie? Could be a bunch of things.
4. A lender would never legally ask a borrower to do anything. The bank is the entity extending credit and as long as they are not discriminating, they are allowed to vet the loan based on credit guidelines. It sounds like to me that if a bank wanted, this would be a viable reason for them to deny the loan if your friend did not produce the documentation asked for.
5. He needs to direct the CPA to amend the return and he can pay the increased tax liability. Once the return is amended, filed and proof of receipt from the IRS is received, your friend should be able to close the loan. Regardless of the change in income.