Due to this increase, CPAs find that this process is becoming more and more confusing and that information regarding comfort letters/third party verification is increasingly important to assure that practitioners are providing optimal service. The AICPA is here to help and has gathered the information below in order to assist members.
Inquiry—No-documentation or low-documentation loans remain popular options within the lending community, especially in lending to the self-employed. The information a prospective borrower is asked to furnish in connection with such loans is limited; however, lenders or brokers still attempt to assess a borrower’s creditworthiness and verify the accuracy of information provided to them by the borrower.
Examples of requested information include
- confirmation of a client’s self-employed status.
- verification of income from self-employment.
- profitability of a client’s business.
- the impact on a client’s business if money is withdrawn to fund the down payment on a real estate purchase.
How may an accountant respond to a request from a client, lender, or loan broker to confirm client information in connection with a pending loan application?
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An additional AICPA resource in response to frequently asked questions regarding third party verification letters has been developed. These answers are non-authoritative responses to those questions most commonly asked. Additional commonly asked questions specific to tax are in development and will be incorporated in this resource in the coming months.
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, “may 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. Learn more in our Section 7216 Consent Form Practice Guide, which includes sample consent forms.
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 clarification 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.