There are so many issues that can come up during the process and banks are not willing to issue a letter and have a potential buyer sign on a home when ultimately they won't qualify for a mortgage.
Not all lenders will require tax returns for a prequal-in fact, many won't-but that doesn't mean it isn't normal.
Main reason... it depends on how you file your taxes. Are you self-employed where you write off a large percentage of your income? Are you in sales and you file an IRS Form 2106 un-reimbursed expenses, or do you have short term capital gains? The truth is most buyers have no idea what their AGI (adjusted gross income) actually shows. That's my job as an LO to be part CPA, part Underwriter and part Detective. We have to spot any possible problems in advance so you don't the 11th hour squeeze. Those are the facts my friend. If you'd like some further information, please feel free to contact me.
Best of Luck!
The Banks are working for the Government in that they want to identify Money Launderers.
The Banks are working for themselves in that they don't want to repeat their past mistakes.
Don't look at it as baring your soul: look at it as you-have-no-choice!