All taxpayers who have ever filed tax returns or had tax forms filed in their name (such as W-2s, 1099s, etc.) have a record of these filings with the IRS in the form of a transcript. As the IRS processes tax forms, the information reported is stored in their computer systems and organized based on the taxpayer’s social security number, or in the case of a business entity, the employer identification number. These transcripts can be complex and difficult to understand, but can be very useful if you find yourself in a situation where you need to see what the IRS sees, as it relates to your taxpayer account.
As I said above, transcripts can be complicated. And there isn’t even just one type of transcript – in fact, there are five! Before we get into the various uses of these transcripts, let’s cover the high points of each type.
- Wage and income transcript – this type of transcript details the amounts and types of income and deductions allocable to the taxpayer, as reported to the IRS by other entities on Forms W-2, 1099, K-1, 1098, 5498 and more.
- Tax return transcript – this document highlights the income and deductions as reported by the taxpayer on their annual tax returns, as originally filed. Oftentimes when applying for a loan, the applicant may be required to provide the lender with several years of tax return transcripts in order to verify income.
- Tax account transcript – details the taxpayer’s tax assessed and tax payments for a given period. Includes tax, interest, and penalties assessed by the IRS, as well as reductions to the taxpayer’s account in the form of withholdings, quarterly payments, extension payments, and tax credits. Also includes some basic information about the taxpayer, such as marital status.
- Record of account transcript – a hybrid of tax return and tax account transcripts, including information from both blended into one document.
- Verification of non-filing letter – this document simply provides evidence that the IRS does not have record of a tax return having been filed for a given tax year. It does not indicate whether the taxpayer had a filing requirement.
There are many reasons taxpayers and tax professionals may want to request one or more of these transcripts from the IRS. As we mentioned above, lenders will often require several years of tax return transcripts prior to approving a loan. Perhaps a taxpayer has gotten behind with their tax filings, wants to get caught up, but cannot locate their records for the last few years. It is possible to reconstruct those years of missing tax information with enough accuracy to actually file returns for the years in question. This would be accomplished by referencing the wage and income transcripts in order to report the correct income and deductions on the returns, as well as the account transcript to report any payments or credits that may be on the taxpayer’s account.
Keep in mind that not all potential forms of income and deductions would be shown on a wage and income transcript – for example, the IRS would not have information regarding a taxpayer’s rental property, or a side business for which they were not issued any 1099s. Nor would they have detail of medical expenses or charitable contributions. So it is important to make sure you are looking at the full picture, and not purely relying on transcripts to prepare returns.
Another common situation that can be resolved with help from a transcript is the case of missing or unknown estimated tax payments. It is not uncommon for clients to forget whether or not they paid their quarterly estimated tax payments, generally provided by their CPA with their prior year tax return. Keeping track of payments (or lack thereof) is one thing the IRS is very good at, so you definitely don’t want to file a return with any uncertainty about whether a payment was made. Obtaining an account transcript can quickly clear up any question about whether the IRS has payments on file.
As I mentioned earlier, taxpayers can certainly request their own transcripts from the IRS, but they are oftentimes confusing to the untrained eye. If you have anything but the most basic of tax issues requiring the use of transcripts, it is recommended to get your tax professional involved. With a signed Form 2848 (Power of Attorney), your CPA can contact the IRS and request the transcript on your behalf, as well as discuss any related issues with the IRS to hopefully come to a resolution of the problem.
For more information on IRS transcripts, or if you have a tax issue that may require the use of a transcript, contact your Henry+Horne advisor.
Austin M. Bradley, CPA