Best Practices: Revisions to SBA’s Financial Information Verification Procedures

Effective March 9, 2022, SBA set forth revised procedures for SBA lenders and Certified Development Companies (CDCs) concerning the verification of financial information for the small business applicant.  See SBA Procedural Notice 5000-829416 (Notice).  The change in policy comes in response to the challenges lenders and CDCs have encountered with the existing verification process, including the inability of lenders and CDCs to obtain verifiable and accurate information from the Internal Revenue Service (IRS) in a reasonable timeframe.  The Notice offers lenders and CDCs an additional option when obtaining financial information in what all parties hope will be a quicker and more reliable process.

Prior to issuance of the Notice, SBA lenders and CDCs were limited to using IRS Form 4506-C, IVES Request for Transcript of Tax Return through the IRS’s Income Verification Express Service (IVES) program.  Under certain SBA loan programs, tax return transcripts are generally required on the following parties: the small business loan applicant(s) and the seller of a business for change of ownership transactions.  During the COVID-19 Emergency Declaration, the IRS temporarily suspended transcript requests through IVES, and SBA issued temporary guidance concerning verification of financial information, allowing lenders and CDCs to obtain the required financial information verification post-closing.  SBA’s temporary guidance expired on September 30, 2021 meaning that, and as of October 1, 2021, lenders and CDCs were again required to comply with the financial information verification process set forth in SOP 50 10 6, pages 204-207.  However, because the flaws in resuming the former system of tax verification have not been rectified by IRS, SBA issued the Notice to provide lenders and CDCs with greater flexibility in the hope that a second option would enhance the process.

Beginning March 9, 2022, pursuant to the Notice, lenders and CDCs now have the option of verifying financial information by utilizing either IRS Form 4506-C or IRS Form 8821, Tax Information Authorization.  In using the IRS Form 8821, lenders and CDCs must ensure the type of transcript requested contains any changes to the original return, if filed by the small business applicant, and the lender or CDC must be listed as designee in Line 2 of the IRS Form 8821.  Lenders and CDCs should update their policies and procedures to note that (i) SBA will not allow the borrower or the borrower’s tax preparer or enrolled agent to file the IRS Form 8821 for purposes of the financial information verification required to obtain an SBA loan and (ii) lenders and CDCs are required to retain the IRS form used for financial information verification in the SBA loan file.

Regardless of the form used, lenders and CDCs must follow the IRS instructions in completing either the 4506-C or 8821 to reduce the risk of rejection by the IRS.  The Notice provides lenders and CDCs with a second option to obtain verification of financial information, with many lenders and CDCs hopeful that the verification results will be more accurate and returned in a more timely fashion. Any concerns with regard to SBA’s new initiative should be reported to SBA promptly, as the Agency needs to know if the new process has addressed the accuracy and timing issues observed.

While the new initiative may prove beneficial, lenders and CDCs must remain vigilant when reviewing and reconciling financial information.  Regardless of methodology, verification must be performed and completed in accordance with SBA rules because failure to reconcile IRS information leaves lenders at risk of being subject to a repair or denial of the guaranty.  For more information related to SBA compliance matters, contact the attorneys at Starfield & Smith at info@starfieldsmith.com or 215.542.7070.