Tax Forms not required by IRS: What are we missing?

Eric’s question:

Many of my borrowers give me as few tax forms as they think they can get away with. How do I know when it is acceptable that a tax form is missing? Is there a list somewhere? And what information am I missing from the missing forms?

Linda says:

Wouldn’t that be great, Eric? And no, there is no list that I know of. And actually, to a certain extent, your list of ‘acceptable’ missing forms is based on your guidelines. That said, I put together a list of common ones for you.

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Know your guidelines

Some lenders are firmer than others when it comes to requiring all tax forms. And often, if you have most of them but realize as you are analyzing and underwriting that you are missing just one, you might consider the risk of the missing information before you delay the loan process for that piece of paper.

If you have borrowers who are balking at the amount of paperwork required these days, especially if you are requiring more than pre-recession, blame it on the regulators. That almost always works.

Be your borrower’s advocate

Last year in one of the Tax Return Analysis training sessions, a Bank Relationship Manager lending primarily to wealthy clients gave me a great idea. If you need additional information say something like ‘In order to advocate for this loan, I am going to need X’. Now you are on the same side working to make the loan instead of on the other side being pushy.

1040 Missing Formsand what you miss without them

I am sure this is not the complete list, but I believe it covers the common missing items. If you have other favorites, let me know at Linda@LindaKeithCPA.com.

• Schedule A if they do not itemize deductions. If you have it look for
  • extremely high medical expenses or charitable contributions. Consider if you need to increase family living expenses.
  • Unreimbursed employee business expenses. Some lenders subtract these from cash flow if they are significant and recurring.
• Schedule B if taxable interest is less than $1,500. If you have it look for
  • note/contract receivable interest in which case the lender needs more info to see what they actually received in cash flow
  • K-1 pass-through interest from an S Corporation, Partnership or LLC. Do not use K-1 pass-through and instead decide if you need the full company return or the K-1 or both.
• Schedule E, Page One if they have LLCs, Partnerships, S Corps, Estates or Trusts (Page two items) but no rentals
• Form 4562 if
  • they did not purchase new depreciable assets in the current year
  • they do not have ‘listed’ property (vehicles also used personally and items used for recreation or entertainment)
• If you have it look for
  • what purchases they have made during the year (See our Tax Return Analysis manual “Essentials & 1040 Review” for how you can tell.
  • what they are reporting for listed property as it relates to a ‘character’ judgment.

Missing Forms in Business Returns

Corporations

• Schedule L Balance Sheet, Schedule M-1 Reconciliation of Book and Tax Return Income and Schedule M-2 Analysis of Retained Earnings if receipts and assets at the end of the tax year are less than $250,000. If you have it look for

• principal due in the next twelve months for debt payment estimates
• where cash flow is coming from and where it is going
• non-deducted expenses and non-taxable income
• Form 1125-E Compensation of Officers if total receipts are less than $500,000. If you have it look for
  • % ownership of officers.

S Corporations

• Schedule L Balance Sheet and Schedule M-1 Reconciliation of Book and Tax Return Income if total receipts and total assets less than $250,000. If you have it see corporations above for what it tells you.

• Form 1125-E Compensation of Officers if total receipts are less than $500,000. If you have it look for
  • % ownership of officers
• Form 4562 if
  • they did not purchase new depreciable assets in the current year
  • they do not have ‘listed’ property (vehicles also used personally and items used for recreation or entertainment)
  • LINDA’s NOTE: This is a great example of a rule that applies to S Corporations but not C Corporations. You cannot take something you learn about one entity type and apply it to another.

If you have it look for

• what purchases they have made during the year (See our Tax Return Analysis manual “Essentials & 1040 Review” for how you can tell.
• what they are reporting for listed property as it relates to a ‘character’ judgment.

Partnerships or any entity filing a Form 1065

• Schedule L Balance Sheet and Schedule M-1 Reconciliation of Book and Tax Return Income, Item F on Page One (Total Assets) or Item L on the K-1 (Capital Account Analysis) if total receipts and total assets less than $250,000. If you have it look for
  • principal due in the next twelve months for debt payment estimates
  • where cash flow is coming from and where it is going
  • non-deducted expenses and non-taxable income
  • capital contributed by and distributions to all owners
• Form 4562 if
  • they did not purchase new depreciable assets in the current year
  • they do not have ‘listed’ property (vehicles also used personally and items used for recreation or entertainment)

If you have it look for

• what purchases they have made during the year (See our Tax Return Analysis manual “Essentials & 1040 Review” for how you can tell.
• what they are reporting for listed property as it relates to a ‘character’ judgment.

Why is it missing?

When I was responsible for commercial borrowing for our construction company, I occasionally would submit an incomplete return because two pieces of paper ran through the copy or fax machine together. Do not assume your borrower is hiding something from you.

And if you find you are often missing something you need, like all the Schedules K-1, modify your ‘ask list’ to specifically list it. Perhaps you are not clearly asking for everything you need.

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