Why Haven’t Loan Officers Been Told These Facts?
It’s that time of year again—not spring, but tax filing time. For those of you with a filing deadline of April 15th, consider yourselves fortunate. Specific business entities such as multi-member LLCs, S Corporations, and Partnerships must file by March 16th.
Many taxpayers are often unaware of their income tax liability until they receive an email or call from their accountant. What should an applicant do when the accountant communicates a tax liability, or the applicant otherwise discovers they owe, in the middle of a loan application? If they can pay the tax bill either when filing or during the extension period, there is usually no problem, as long as it does not negatively impact their already underwritten liquid assets. However, what happens if a customer is unable to pay a new tax bill before closing?
Taxes owed must be paid when submitting the tax return. If a taxpayer cannot pay the full amount, the taxes become delinquent. If the applicant fails to disclose any delinquent taxes on the Uniform Residential Loan Application (URLA), the omission may constitute mortgage fraud.
Since credit reporting agencies (CRAs) have stopped reporting tax liens, many applicants have taken the opportunity to exclude their tax debt from the Uniform Residential Loan Application (URLA). Because applicants and other stakeholders seem to evade the consequences of this omission, it’s understandable why some individuals might believe it doesn’t really matter.
For many years, federal agencies have been required to check if applicants for guarantee programs have outstanding federal tax debt and to resolve any issues before granting guarantees.
In 2019, the HUD Inspector General reported that the FHA failed to prevent loans from being issued to tax debtors, despite federal requirements to do so.
The HUD Inspector General Report
“In fiscal year 2018, FHA insured at least 56,376 loans worth $13 billion, which were not eligible for insurance because they were made to borrowers with delinquent Federal tax debt. In addition, it insured another 57,918 loans worth $14.3 billion to borrowers who had delinquent taxes and payment plans with the Internal Revenue Service (IRS) but may not have met FHA’s requirement for 3 months of payments on the payment plans. We were not able to determine the eligibility of these loans because we did not have information showing whether these borrowers completed 3 months of payments on their payment plans.
We recommend that FHA require lenders to obtain the borrowers’ consent to verify the existence of delinquent Federal taxes with the IRS during loan origination and deny any applicant with delinquent Federal tax debt not meeting FHA requirements. We also recommend that FHA revise its handbooks to reflect that tax liens and judgments are no longer reported on credit reports and for uniform treatment of delinquent tax debt for forward and reverse mortgages.”
Agency Guidance
The government-sponsored enterprises (GSEs) and government guarantors offer a range of guidance, from well-defined to less-defined, regarding delinquent taxes. In certain cases, lenders must deduce a prudent course. However, there are instances where the guidance explicitly specifies the appropriate actions to take regarding delinquent federal taxes. For example, the FHA 4000.1 provides explicit requirements for the agency’s reverse mortgage program.
Expressly Stated
FHA 4000.1
II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
B. Title II Insured Housing Programs Reverse Mortgages
2. Origination/Processing(10) Delinquent Federal Tax Debt
(a) Standard: Borrowers with delinquent Federal Tax Debt are ineligible.
Necessary Deduction
II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
A. 4. Title II Insured Housing Programs Forward Mortgages
Underwriting the Borrower Using the TOTAL Mortgage Scorecard (TOTAL)
(Q) Obligations Not Considered Debt (TOTAL)
Obligations not considered debt include:
• Medical collections
• Federal, state, and local taxes, if not delinquent and no payments are required
Lenders must deduce from the section on forward mortgages that delinquent taxes are reportable debt. For forward loans, the FHA 4000.1 Section II(A)(4)(Q) states that federal taxes are not considered debt “if they are not delinquent and no payments are required.” Conversely, this implies that delinquent federal taxes do count as debt. Therefore, for underwriting purposes, if federal taxes are delinquent, they must be recognized as an obligation. As a result, this debt should be acknowledged in the URLA sections 2c (“Liabilities – Credit Cards, Other Debts, and Leases that You Owe”) and 5b(H) (“Are you currently delinquent or in default on a Federal debt?”).
If the Applicant Fails to Mention Delinquent Taxes
If the misrepresentation is discovered, both you and your customer might come under scrutiny. It’s crucial to uphold transparency and accuracy to prevent the appearance of deceit.
If authorities target the consumer, the consumer needs a good attorney. The consumer has two main defenses:
- No intention to deceive: The misrepresentation was unintentional or resulted from a misunderstanding.
- The second defense requires them to betray you. The consumer will say, “The loan officer said not to worry about it,” which is quite plausible.
What Have the Courts Ruled
In 2020, a federal appeals court addressed a lower court’s mortgage fraud conviction under 18 USC 1014 for false statements on a loan application. The defendant, a licensed attorney, had IRS issues and submitted a mortgage application that excluded the federal tax claims against him. Regarding the tax debt omissions, the appeals court stated:
Finally, (Appellant) contends the evidence was insufficient to convict him on Count 6 of the superseding indictment—that (Appellant’s) failure to list his outstanding tax obligations as “Federal debt” constituted the making of a false statement in a loan application. ….. Given this evidence [debt exclusion from the URLA], a jury could reasonably conclude that the (Appellant’s) failure to disclose his tax liability when asked whether he was “delinquent or in default on any Federal debt, when asked to list “all outstanding debts,” constituted the submission of a loan application containing knowingly false statements.
Lenders Can Effectively Negotiate Delinquent Taxes When Given the Opportunity to Assist
All agency financing provides various ways to address delinquent taxes. It requires time and patience. For example, FNMA’s policy states:
B3-6-05, Monthly Debt Obligations (03/04/2026)
Federal Income Tax Installment Agreements
When a borrower has entered into an installment agreement with the IRS to repay delinquent federal income taxes, the lender may include the monthly payment amount as part of the borrower’s monthly debt obligations (in lieu of requiring payment in full) if:
- There is no indication that a Notice of Federal Tax Lien has been filed against the borrower in the county in which the subject property is located.
- The lender obtains the following documentation:
- An approved IRS installment agreement with the terms of repayment, including the monthly payment amount and total amount due; and
- Evidence the borrower is current on the payments associated with the tax installment plan. Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date and the next payment amount owed and due date. At least one payment must have been made prior to closing.
As a reminder, lenders remain responsible under the life-of-loan representations and warranties for clear title and first-lien enforceability in accordance with A2-2-07, Life-of-Loan Representations and Warranties.
The payments on a federal income tax installment agreement can be excluded from the borrower’s DTI ratio if the agreement meets the terms in Debts Paid by Others or Installment Debt described above. If any of the above conditions are not met, the borrower must pay off the outstanding balance due under the installment agreement with the IRS in accordance with B3-6-07, Debts Paid Off At or Prior to Closing
The Best Way To Tackle Delinquent Federal Taxes
The best approach to address this issue is to educate our referral partners. Real estate agents should be aware that lenders use various tools to identify issues, such as delinquent federal taxes and undisclosed debts. Real estate professionals can inform their clients to reach out to a lender early to address any obstacles to financing. With time, lenders can overcome these challenges.
BEHIND THE SCENES: MORTGAGE FRAUD, FAILURE TO DISCLOSE FEDERAL TAX LIABILITY
Prominent Lawyer Convicted at Trial of Tax Evasion and Mortgage Fraud
The SCOTUSblog Founder Hid Millions in Gambling Income and Debts
A federal jury in Greenbelt, Maryland convicted Thomas C. Goldstein — a prominent appellate attorney who argued more than 40 cases before the U.S. Supreme Court and co-founded the widely read legal website SCOTUSblog — yesterday of tax and mortgage fraud.
“I thank the jurors for their service and careful attention during this lengthy trial,” said Assistant Attorney General A. Tysen Duva of the Justice Department’s Criminal Division. “Yesterday’s verdict holds Thomas Goldstein accountable for cheating the tax system and lying to mortgage lenders. Mr. Goldstein is a sophisticated attorney who concealed millions of dollars in income, manipulated his law firm’s books and deceived lenders – all to fund his gambling and lifestyle. This investigation, prosecution, and conviction reflects the dedicated work of the prosecutors and agents who brought this case to trial on behalf of the United States. The Criminal Division will continue to pursue those who evade their tax obligations and mislead financial institutions.”
“Goldstein chose fraud and deceit over honesty and tried to cheat the American taxpayer while living a lavish lifestyle,” said U.S. Attorney Kelly O. Hayes for the District of Maryland. “He gambled that he wouldn’t get caught, and that gamble did not pay off. Our office, along with our law-enforcement partners, is committed to holding those accountable who break the law, no matter who they are.”
“Mortgage laws exist to protect lenders and borrowers from fraudsters like Goldstein,” said Assistant Director in Charge Darren Cox of the FBI Washington Field Office. “His conviction should serve as a message to all prospective homebuyers: The FBI will investigate and bring to justice individuals who try to cheat the system by lying on their mortgage applications, so we can level the playing field for every hardworking American who wishes to buy a home.”
“This is precisely the type of conduct IRS Criminal Investigation (IRS-CI) and our law enforcement partners are committed to deterring,” said Special Agent in Charge Kareem A. Carter of the IRS-CI Washington, D.C. Field Office. “Today’s conviction of the defendant sends a clear message that we have the tools and resolve to protect our tax system by investigating, prosecuting, and holding accountable those who seek to defraud the United States.”
According to court documents and evidence presented at trial, Goldstein, of Chevy Chase, Maryland, was the sole owner of Goldstein & Russell, P.C., a boutique law firm specializing in appellate litigation, including litigation before the U.S. Supreme Court. Goldstein was also a high-stakes poker player, frequently playing in games involving tens of millions of dollars.
Between 2016 and 2023, Goldstein stopped paying taxes on time, as required by law, and engaged in a scheme to evade his taxes for 2016. Goldstein carried out the scheme by hiding millions of dollars in poker wins and losses from the government, diverting legal fees payable to his law firm to his personal bank account to satisfy poker-related debts, directing people to pay his creditors instead of sending payments directly to him, and using the law firm’s assets to satisfy his poker debts and then causing those payments to be falsely classified as “legal-fee” expenses on the firm’s books and records. As a result, Goldstein underreported his income and did not pay all the taxes that he owed, while spending millions on personal expenses such as poker, travel and luxury goods.
In 2021, Goldstein submitted false mortgage applications to two separate mortgage lending companies, seeking financing to purchase a $2.6 million dollar home in Washington, D.C. On those mortgage applications — which required Goldstein to list all his liabilities and debts — Goldstein omitted millions of dollars of liabilities, including more than $14 million he owed at the time on two promissory notes, as well as taxes he owed the IRS. Goldstein’s false statements to one of the mortgage lenders enabled him to obtain a $1.98 million loan.
The jury convicted Goldstein of tax evasion, assisting in the preparation of false tax returns, willful failure to timely pay taxes and making false statements to mortgage lenders. He faces a maximum penalty of five years in prison for tax evasion, three years in prison for each count of helping to prepare false tax returns, one year in prison for each count of willful failure to pay taxes, and 30 years in prison for each count of making false statements to mortgage lenders. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors. A sentencing date has not been set.
IRS Criminal Investigation and the FBI are investigating the case.
Senior Litigation Counsel Sean Beaty and Trial Attorneys Emerson Gordon-Marvin and Hayter L. Whitman of the Criminal Division’s Tax Section, and Assistant U.S. Attorney Adeyemi Adenrele for the District of Maryland, are prosecuting the case.
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