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Rampant non-reporting of income: What's a lender to do?

“Up to 30 percent of workers who are not issued either W-2s or 1099s do not report either all or a portion of their income.”

This from Accounting Today in an article by George G Jones and Mark A Luscombe about the new requirements to file 1099’s for goods as well as services. (That is going to be a nightmare for your small business borrowers!)

So what do you do when a prospective borrower says:
“Here is my tax return but let me tell you what I really make…”

Consumer and Mortgage Lenders

In my experience, consumer and mortgage lenders often take a cut-and-dried approach. “If it is not on the tax return I won’t be able to use it. Let’s see what we can do with the income you reported.”

Notice that if they can qualify them with what is reported, they are doing it even when the prospective borrower has come right out and said the lie to third parties for financial gain. I am not judging at all, here. Just be sure you are following your guidelines and for heaven’s sake, check everything. If they lie to the IRS they are more likely to lie to you.

Business Lenders

Business loans are often bigger. The collateral may be less marketable than a house or a car. (Notice I said ‘may be’.) The relationship often is more ongoing. If a business lender thinks a prospective borrower cheats on their tax return in any significant way, I recommend they find a way to say ‘no’. Go find borrowers you can trust.

Maybe you misunderstood…

There are many very legitimate reasons for what appears to be under-reporting of income. Some income is not taxed, like minister’s housing allowance and child support. Other income is not yet reported on the tax return because it is cash-basis. Perhaps the work was done but the tax return does not yet show the income.

So when the borrower says: “Here is my tax return but let me tell you what I really make…” hear them out before you assume they are cheating.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at, she speaks at banking associations on risk management, lending and director finance topics.