Tax season is still a few months off, but it is always a good idea to make sure one has their ducks in a row. One such tool available to tax preparers is the tax transcripts. However, with so many different transcripts available combined with the changes the IRS made to these documents, it is easy to become confused.
What are tax transcripts? Why are they useful?
What are tax transcripts?
Tax transcripts are documents provided by the IRS describing a taxpayer’s returns. These transcripts give details on a return in lieu of a full copy of a tax return. While no transcript provides all the information provided in a tax return, different transcripts provide different information.
Before understanding why tax transcripts are useful, let’s review the different types available to the public. There are five different types of transcripts preparers can request from the IRS.
- Tax Return Transcript: Shows most line items from your original tax return. It doesn’t show changes after you filed your original return. These types of transcripts are only available for the current year.
- Tax Account Transcript: Shows basic information on the taxpayer as well as any changes made to their original returns. These types of files are available for up to ten years.
- Record of Account Transcript: Combines Account and Return transcripts into a single document. The current year and up to three previous years are available.
- Wages and Income Transcript- Shows information from a taxpayer’s income side.
- Verification of Non-filing letter- Proves that a taxpayer did not file for a given year.
Why would you want them?
The IRS recommends that a taxpayer keeps their tax forms for three years.
If a person has lost their copies of a tax form, they can certainly use their transcript to get their income history. The forms certainly help a tax preparer compile accurate future tax returns.
However, even those who have their past returns find tax transcripts incredibly useful. For instance, individuals and businesses may better understand their status with the IRS. Additionally, the documents to frequently used to resolve notices and discrepancies. Often, lenders may require a tax transcript as part of their application process.
Changes at the IRS
In August of 2018, the IRS put in place new security around tax transcripts. These new precautions help protect taxpayers from unscrupulous criminals from gaining access to data to perpetrate fraud. Those who have been using tax transcripts in the past are likely to notice significant changes.
Some of the most significant changes are around securing identifying data fields. Moving forward, tax transcripts will provide
- Last 4 digits of any SSN listed on the transcript: XXX-XX-1234
- Last 4 digits of any EIN listed on the transcript: XX-XXX-1234
- First 4 characters of the last name for any individual or business name
- First 6 characters of the street address, including spaces
- Last 4 digits of any account or telephone number
- All money amounts, including balance due, interest and penalties
In short tax transcripts (and EIN verification services like EINFinder.com) ensure tax preparers include correct information on returns. These tools help reduce the chance of filing time-consuming amendments.