Tax Practitioners: Don’t Write “Comfort Letters” To Lenders

Lenders will push your clients to get you to write all sorts of letters to them.

Don’t write a single one – you could be liable for the loan if your client defaults. Worse yet, you could beheld negligent for making assumptions about things you don’t really know.

if your a lender and you are reading this, sorry. The liability that these requests impose on tax practitioners is monumental – and we are not getting paid to take on this liability. it’s just not worth it. Not even close.

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Types of letters that lenders will request from you

Letter requests from lenders to tax preparers come in all types.

One type of request asks for a letter explaining a position on a tax return or even explaining the tax return itself. For example they may ask, “why was this reported on line 21?”

Don’t answer them in writing and don’t write a letter of explanation.

Politely tell them that you prepared the tax return according to the IRS publications, instructions, and the tax code and that explain these items to a third party is not a service that you are able to provide. They can read the instructions.

letters to lenders

Again, be VERY professional, polite, and and even apologetic about it.

Mortgage professionals go through a lot – and they are only trying to please the underwriters, to serve the client in getting a loan, and to make a few bucks for their hard work.

But still, don’t write these letters to help them. It’s not that you don’t want to help, it’s because you have no business doing so.

As another example, some lenders want you to write a letter certifying that your client’s income and business activity is sustainable. These are the “worst” as far a liability are concerned, and obviously the most dubious.

How would you know how viable your client’s business might be other than what the client tells you about it? Did you audit his activity and his bank statements and compare them to business trends and forecasts in the activity?

No you did not.

You just transferred his or her P&L onto a Schedule C or an 1120s tax return. That’s all you did. So you don’t really know if his business is actually profitable or actually viable going into the future.

As long as these items appear ordinary, necessary, and reasonable, then you sign as the tax preparer and collect your tax return fee.

That’s where your duty, and your responsibility, ends.

Let’s go over how to deal with a lender asking you to to write any such letter.

Sample reply to client or lender that is requesting a letter

Dear client (or mortgage broker):

Unfortunately, our E&O carrier absolutely prohibits us from participating in these letters.

Lenders can potentially use them to claim that we have a share in the liability for a loan if at some point a borrower does not make payments.

We prepare the tax return based upon information provided by the client, and if we attest or apply judgment to the accuracy of information that we have not verified, then we have stepped beyond our role as your tax preparer.

I’m very sorry about that – it’s not that we don’t want to help.

Please explain to the underwriter that there is nothing we can write in such a letter that verifies anything that is not already on the tax return.

Thanks for your understanding.

I actually have something like this in my engagement agreement. This way, at least, I warned them in advance that I will not write these letters under any circumstance.

There are firms that specialize in these “letters” and certifications

Independent auditing firms exist to do just this.

Usually, these are for more sophisticated business loans or sale situations as compared to your average home loan or loan for a rental property. Also, certain states and federal agencies require these independent audit reports/letters for various reasons.

Guess how much these firms charge for such a letter….

They generally cost in the tens of thousands of dollars – for the simple ones.

Why? Because the firm can be held responsible if they overlook things or act negligently. Plus it’s a lot of hard work and it takes a lot of experience – even for simple verification letters.

If you as a tax preparer write such a letter without the experience and applied due diligence as these firms provide, you are probably setting yourself up for some serious liability. Or you are doing a lot of work and assuming a lot of liability for free.

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