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

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.