accountant comfort letter
Updated February 11, 2020

Why CPAs Hate Writing Comfort Letters to Verify Self-Employment for Mortgage

Mortgages

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If you’ve been a CPA, EA, or otherwise a tax preparer for any length of time, you’ve probably been asked by a mortgage company to write a comfort letter verifying that your mutual client is self-employed.

From the mortgage company’s perspective, this probably doesn’t sound like a big deal: “You’re this guy’s accountant, right?  You do his taxes?  You prepare a Schedule C for him, so why not just put together a quick letter stating that he’s self-employed?”

Well, as a CPA, hear me out as I give you three reasons why accountants hate writing these kinds of comfort letters.

1. I don’t want to do the lender’s job for them.

As a CPA, I know that asking the client’s tax preparer to verify his or her self-employment status has become the mortgage industry standard, but frankly, I think this is a bit silly.

After all, it’s the lender’s job to determine the creditworthiness of the borrower before extending credit to him or her, and obviously a big part of that determination for a potential borrower who claims to be self-employed is to actually verify that the individual is actually self-employed.

So as a CPA, I’m left wondering why lenders don’t do their own due diligence to make that determination and not rely on me as the tax preparer.

2. I actually might not be 100% sure that my client is self-employed.

Schedule C is the form that self-employed people use to report their self-employment income.  I prepare plenty of Schedule Cs each tax season for clients who tell me they are self-employed.

They provide me with 1099s, their business books and records, and other documentation, and I prepare their Schedule C for them along with the rest of their tax returns.

But here’s the deal.  As a tax preparer, I generally make a good faith reliance on the client’s representation that he or she is self-employed.

In other words, if the client tells me that he or she is self-employed, and this seems like a reasonable statement, and he or she provides me with his or her books and records, I can generally just prepare the client’s tax return based on this information without any strenuous verification required.

See, when I sign a tax return, I am stating that it is “true, correct, and complete to our best knowledge and belief.”

Except in certain circumstances (e.g. for Earned Income Credit due diligence), I don’t have to verify that a client is self-employed, nor do I want to be in a mortgage company’s file — which provides support to make a loan to someone for hundreds of thousands of dollars — representing that my client is actually self-employed when there is a chance (however slim) that he or she is not and has been blowing smoke the whole time.

As a tax preparer, I generally don’t have to verify a client’s self-employment to do my job well; mortgage lenders do.

So I respectfully act that mortgage lenders consider this before asking a CPA for a comfort letter.

3. I’m freaking busy.

Look, Mr. Loan Processor, I know you’re busy.  You have a backlog of files to get through and will probably be staying late tonight to get them all done.

I know you want to finish your work as quickly as possible, and part of your work is getting a CPA to give you a comfort letter verifying a client’s self-employment status.

And as a CPA, I’m busy too (who in financial services isn’t?) and will likely have a late night as well.  I have clients to call, returns to file, and IRS notices to respond to, and the last thing I want to do is draft up a letter indicating that my client is self-employed even when there’s a chance he or she is not.

So what’s the solution?

To be honest, I don’t know.  The prevailing practice among lenders is to ask tax preparers for these comfort letters, and I don’t see that changing anytime soon.

While yes, this is self-serving, I would love to see the lending profession develop their own due diligence system for determining whether or not a client is self-employed.

But until that point, here’s what I do: I write a letter simply stating what I know:

  • That I prepared the client’s tax return
  • That the client signed the tax return (or e-file signature authorization) indicating that he or she reviewed the tax return and agreed with it to the best of his or her knowledge
  • That I simply prepared the tax return based on information given to me by the client
  • That I did not independently verify or validate any of the information the client provided to me
  • That I make no guarantee that information on the client’s tax return can be relied upon to make a lending decision
  • That any use by the lender of the information on the client’s tax return to make a lending decision is at the lender’s sole discretion at its own judgment

I’ve found that lenders have typically accepted these letters for their file.

Logan Allec, CPA

Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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