A short guide to IRS transcripts
An IRS transcript is an administrative record of the actions that have taken place in an individual’s tax history. While they are notorious for being complex, they can be incredibly helpful in the hands of tax professionals who know how to use them. But it’s important to understand and use transcripts to their fullest potential.
Types of transcripts
There are five kinds of transcripts, so you need to know which one will provide you with the information you need. You should note that unlike tax returns, they are all free. Also, you will have to use Form 8821 and 2848 to gain authorization to access your clients’ transcripts. I have listed each transcript type with a short description.
Tax account transcript: This type of transcript shows a year-by-year history of a taxpayer’s account that includes basic information but also more detailed data. For example, you can find the person’s marital status and adjustments made by the taxpayer after they have filed a return, including filings, extensions, withholding, credits, penalties and assessments. If requested online or with Form 4506-T, you’ll have access to up to 10 prior years of information. If requested by mail or phone, access will be limited to three years.
Wage and income transcript: This document discloses a taxpayer’s income as reported to the IRS. These transcripts are helpful for looking up federal records, but they do not include state income tax withholding. It is available for the prior 10 years if requested online or with Form 4506-T, and the current year’s information may not be available until July.
A wage and income transcript assembles all information concerning W-2s, 1099s, 1098s, K-1s and 5498s. It can be helpful for verifying employment or filing an extended tax return. These transcripts can be longer than 100 pages, but it is possible to request a one-page summary version.
Tax return transcript: This shows most of the line items from a taxpayer’s tax returns, including the 1040s as they were originally filed, but it doesn’t provide any changes made after the filling. This type of transcript may be useful for mortgages, financial aid and student loan lenders. You can request a tax return transcript for the current tax year and the previous three years.
If your client's spouse on a joint return is requesting this transcript, they must ask for it online or use Form 4506-T. However, the primary taxpayer on the joint return must make the request by phone or mail.
Record of account transcript: A record of account transcript is a mix of tax account transcripts and tax return transcripts. It is available for the current tax year and the prior three years. You can request this document online or by using Form 4506-T.
Verification of non-filing letter: This document provides proof that the IRS has no record of a filed return for the requested year but does not indicate whether or not a return should have been filed. This letter is automatically generated if the return has not yet been processed.
This transcript can be requested for the current tax year and up to the 10 previous years using Form 4506-T, but if the demand is made by mail or phone, only up to three previous years can be provided. The current tax year is available after June 15.
Principal reasons to use a transcript
IRS transcripts contain so much data that they can be useful for a lot of situations. We have listed the most common cases where you would probably need to request one or many transcripts.
Access your client’s tax history: Transcripts will help you understand in detail a client’s standing with the IRS. For example, you’ll be able to see penalties, interest owed on tax liabilities, past return history, and if and when an audit happened. A tax account transcript can be very useful to familiarize yourself with a new client.
Find lost or misplaced records: If a client cannot find a personal record — such as W-2s or 1099s — you can request their wage and income transcript. This would include a copy of every W-2 and 1099 for each tax year.
Check for returns to be amended or reconstructed: Transcripts can also help you identify whether a client’s past tax return should be amended and make it easier to do so. The client’s transcripts will provide details about previous tax returns, which can be helpful if you are missing physical copies.
Typically, a return transcript will help you determine which returns have to be amended and you will need a wage and income transcript to make those changes. You might also consider getting a tax account transcript for this purpose. It’s also possible to reconstruct a tax return that has been lost with the required information from a transcript.
Determine if first-time penalty abatement applies: The most recent years’ account transcripts will allow you to identify whether or not a client qualifies for first-time penalty abatement.
To qualify, the below requirements must be met by your client:
- Has filed all required returns;
- Has paid, or has arranged to pay, any due tax; and,
- Does not have any penalties for the three tax years prior to the tax year in which the penalty was received
For more detailed information about penalty abatements, you can consult this ebook.
Help protect your client from tax fraud: Unfortunately, today identity theft through the filing of fraudulent tax returns is rising exponentially.
Taxpayers who fall victim to tax fraud have long delays in getting the refund due them. The average identity theft case takes 180 days to resolve, and some situations can take up to a year.
You can help reduce tax return fraud for your clients by becoming more familiar with their transcripts. If a tax return has been filed with your client’s personal information, it will show up on their account as a line item, and if you are aware that your client hasn’t filed a return at that time, they may be a victim of tax fraud.
You should alert both your client and the IRS if you spot a suspicious line item on the transcript. The damage done by the fraudulent claim will be significantly less detrimental if the refund money has not yet been paid out.
If your client is the victim of a fraud, they must fill out Form 14039, an Identity Theft Affidavit. The phone number for the IRS Identity Protection Specialized Unit is (800) 908-4490.
Tips on how to read a transcript
Transaction codes: Transaction codes are added to a taxpayer’s transcripts to indicate changes made to the taxpayer’s IRS account. They provide a literal description of any action made. That’s why post-filing compliance activity can generate confusing transcripts. Document 6209 is a guide to understanding these transaction codes. But even if you have extensive experience with transcripts, Document 6209 can be confusing and requires more context to be well understood. Many tax professionals still misinterpret codes and draw the wrong conclusions.
You can find a list of transaction codes in the IRS Transaction Codes Pocket Guide.
Automated reports: There are software solutions available that make analyzing transcripts effortless. By generating a report each time you a transcript is pulled, these solutions can make sense of confusing transaction codes.