Taxpayers Beware: If you provide phony tax returns in connection with a loan application, the IRS and the mortgage lending industry are now teaming up to nail you. In a secret project launched in Northern California, the IRS and several leading banks have been aggressively busting dishonest borrowers. Evidently, the program was launched in California due to the significant number of fraudulent tax returns and information submitted with bank loan applications. Be forewarned: the tax return you submit to your bank verifying your income had better match the tax return filed with the IRS, or federal agents may come knocking at your door.
This pilot project, which began in January, 1995, is intended to "detect and deter the use of false copies of income tax returns to obtain credit," according to a Memorandum obtained by Tax Analysts and reported in its September 30, 1996 issue of Tax Practice. The mortgage banking industry suspects that more than 25% of its loan applications involve overstatements of income.
Lenders are faxing a loan applicant's reported income to the IRS and it is responding within 48 hours as to whether the income reported to the bank matches the tax return on file. (Note: it used to take the IRS about 6 months to respond).
If there is a discrepancy which exceeds $10,000, then expect an IRS audit. Thus far, there have been over 1,000 audits triggered under this program. Soon, the IRS hopes to have this program nation-wide and is currently signing up banks who are interested.
Ironically, the IRS hopes to provide on-line verification of loan information to member banks -- a use of the Internet probably not contemplated by its pioneers.
A grueling tax audit may not be the worst of your troubles: It's also a federal crime to lie about your income to obtain a loan from a federally insured bank, so expect the Justice Department to investigate any reported irregularities and possibly bring a civil or criminal lawsuit against you.
Title 12 United States Code ("USC"), Section 1014 prohibits the making of false statements to a bank, which is federally insured, in conjunction with a loan application; a violation may result in fines, imprisonment or both. 12 USC Section 1833a and 18 USC 981(a)(1)(C) state that a person who violates 12 USC 1014 can be subject to a monetary fine of $1,000,000 and forfeiture of any property received by a fraudulently obtained loan.
If the Justice Department contacts you, hire a competent attorney - immediately! Find out whether the investigation is civil (fines only) or criminal (fines plus prison). If it's civil and you never obtained the loan, let the U.S. Attorney know that and offer to settle the case promptly for a full cash settlement. The settlement penalty should be approximately 3% of the loan amount.
Since your settlement is independent of any IRS audit or investigation, the settlement agreement should state that you are not admitting any guilt, but have settled to avoid the costs, delays and uncertainty of a trial. Also, make sure that the settlement agreement or your name is not used by the Justice Department in any subsequent press releases. The last thing you want is for your name to be splashed across your local newspaper as someone caught defrauding a bank!
The following language should be considered as part of your settlement agreement:
Under Recitals, include:
The parties desire to reach a full and final compromise of all issues and disputes arising out of the above civil fraud claims and allegations, in part, to avoid the expense, delay and uncertainty of litigation.
In the Term of Agreement, include:
This Settlement Agreement is made without admission of any liability, fact, claim or defense by any party hereto. This Settlement Agreement covers all loan applications made with, or information provided to, [name of lending institution].
This Settlement Agreement is confidential and shall not be disclosed to any third parties. Specifically, the U.S. Attorney agrees not to issue a press release, contact the news media, or provide the news media with [Defendant's] name or any information pertaining to the matters contained in this Settlement agreement
Loan fraud has become serious business. Do not falsify a tax return as part of your bank loan application and do not misstate your income. If you do and get caught, keep your cool and get competent legal representation before discussing the matter with the federal authorities. Attempt to negotiate a civil settlement in which you make no damaging admissions of guilt and which protects you from becoming a public spectacle.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**