A CPA receives a request from a client to provide a letter to the client’s mortgage broker, lender, adoption agency, or other third party. The request seems simple enough and harmless. All the client asks is that the CPA verify that this is her client, that she has been preparing the client’s income tax returns, and that the client is employed by a particular employer or is self-employed. Is there any harm in the CPA signing the client’s suggested letter or writing one of her own?
CPAs should remember that they prepare tax returns based on information provided by the taxpayer. It is very likely that they did not audit or otherwise verify the information used in the preparation of the returns. In fact, Circular 230 affirms that the CPA, in preparing a tax form:
[M]ay rely in good faith without verification upon information furnished by the client” but “may not ignore the implications of [other] information . . . actually known” by the CPA, and he or she must make reasonable inquiries if the information provided “appears to be incorrect, inconsistent . . . or incomplete (Circular 230 §10.34(d)).
In addition, disclosing your client’s tax information to 3rd parties or government agencies other than the IRS or use of their information for purposes other than the preparation of their return may require client consent under section 7216 of the internal revenue code.
In April 2012, the Farm Service Agency (FSA) started sending letters requesting “certification” of income as an alternative to providing an actual return as part of their loan renewal or qualification process. The AICPA immediately engaged in a discussion with FSA to clarify the definition of “certification” for this purpose, since the due diligence requirements under Circular 230 and the AICPA Statements on Standards for Tax Services do not rise to this level. In response, the Tax Practice Responsibilities Committee developed the FSA Certification Letter Guidance web page to provide comprehensive information and resources regarding these letters.
Professional standards prescribe what CPAs can and cannot do in these circumstances, and there are professional risks to signing these “comfort” letters or any other request for “certification” of tax return information. The third parties requesting these letters are not the CPA’s clients. Tax preparers therefore should not convey any information to anyone without their clients’ written permission. This is a requirement under professional ethics standards, the Gramm-Leach-Bliley Act, the Internal Revenue Code, and other federal and state privacy statutes and regulations. A June, 2008, article from The Tax Adviser titled “Concerns About CPA Letters to Third Parties” (available via the Journal of Accountancy) is still relevant and includes a great discussion on these issues.
Additional AICPA Resources:
- 3rd Party Verification Q&A (October 2013) - In response to frequently asked questions regarding third party verification letters a Q&A has been developed.
- Section 7216 Consent Form Practice Guide - The Section 7216 Consent Form Practice Guide includes sample consent forms.
- FSA Certification Letter Guidance web page - This web page provides comprehensive information and resources regarding third party verification letters.
- AICPA Webinar Series - The AICPA recently hosted a webinar, "You Want Me to Verify What? Understanding & Responding to Third Party Verification Requests", regarding third-party verification requests. The webinar is available for re-play.
- Journal of Accountancy Article - Entitled "Concerns About CPA Letters to Third Parties", this article is available via the Journal of Accountancy.
- AICPA Insights - Sue Coffey, CPA, CGMA, Senior Vice President – Public Practice and Global Alliances, has authored a blog post to help CPAs determine the best course of action for responding to requests for third-party verification. See "That “Comfort Letter” Request May Really be a Third-Party Verification" for more.
- AICPA Insights - As the economy starts to
recover, more small businesses and individuals will be looking to move
forward by applying for loans, mortgages or refinancing. The AICPA’s
Jina Etienne, CPA, Director of Taxation, American Institute of CPAs
discusses the need for CPAs to be ready to respond to a request for a
third-party verification (or comfort letter) in this post "Trust But Verify—Another Perspective on Comfort Letters".
- AICPA Firm Practice Management - PCPS Area - The PCPS Firm Practice Center provides a venue for CPA firms to harness business opportunities and overcome challenges in their firms. PCPS—the AICPA Private Companies Practice Section—provides a rich array of valuable information and resources for firms of all sizes in the area of practice management.
- AICPA Professional Liability Insurance Program - Find out why it’s imperative to find out why lenders and loan brokers are seeking this information and how you should respond. Download the article "Third Party Verification Letters"
- Technical Hotline -The AICPA's Accounting and Auditing Technical Hotline
provides members with free, high-quality technical assistance by phone
concerning issues related to: accounting principles and financial
reporting; auditing, attestation, compilation and review standards. The
hotline is available from 9 a.m. to 8 p.m. Eastern via telephone at
877-242-7212. Additionally, questions may be submitted electronically.
The AICPA would like to know more about the types of third-party verification requests you’re receiving and we’re here to help answer your specific concerns. Please email us at firstname.lastname@example.org for more information.