What is a CPA letter? What a CPA can and cannot confirm

Requests use the same words for very different jobs. Before you write anything, find out which one the requester means; the AICPA Tax Section column on these requests starts there too (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018).

A verification letter is a letter that states facts, not opinions. The line that matters is between confirming a fact and giving assurance: the Tax Adviser calls it narrow, but it separates client service from a liability risk (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018).

Return preparers rely in good faith on what the client provides, under Circular 230 § 10.34 (Journal of Accountancy (AICPA), “Concerns About CPA Letters to Third Parties,” Mar. 2009). So a sentence saying the income is “accurate” or “verified” claims work the CPA never did.

By contrast, assurance on solvency means any statement that the client is, or will stay, able to pay its debts. The AT-C 9105 interpretation bars a CPA from giving it through any examination, review or agreed-upon procedures (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018).

A consent to disclose is the client’s signed permission for the preparer to share return information with one named recipient. A preparer may not disclose tax return information to a lender without it (26 CFR 301.7216-3, Disclosure or use permitted only with the taxpayer’s consent). The consent names the preparer, the taxpayer, the recipient, the purpose and the information, and the taxpayer signs and dates it (26 CFR 301.7216-3, Disclosure or use permitted only with the taxpayer’s consent).

For a Form 1040 filer, Rev. Proc. 2013-14 adds mandatory statements in a set order, and a one-year default duration when none is given (Rev. Proc. 2013-14, Internal Revenue Bulletin 2013-3). A consent to disclose must sit in a separate document from any consent to use (Rev. Proc. 2013-14, Internal Revenue Bulletin 2013-3). On paper, it needs at least 12-point type, and every sheet must deal only with that disclosure (Rev. Proc. 2013-14, Internal Revenue Bulletin 2013-3). The consent form below follows that text.

A business return is different. The revenue procedure’s wording is written for Form 1040 consents, so a business consent may use other wording, as long as it meets the regulation (Rev. Proc. 2013-14, Internal Revenue Bulletin 2013-3).

The AICPA Code adds its own rule: confidential client information is not disclosed without the client’s specific consent (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018).

For loans sold to Fannie Mae, the lender verifies self-employed income with the signed personal and business returns for the past two years, or IRS transcripts of them (Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower). One year of returns can be enough when the business has existed for five years and the borrower has owned 25% or more of it for five years in a row (Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower). The lender then runs its own cash flow analysis (Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower).

It also completes a verbal verification no more than 120 calendar days before the note date, confirming the business exists (Fannie Mae Selling Guide B3-3.1-04, Verbal verification of employment). The Guide lets the lender pick the method that suits the business structure, and it does not require a CPA letter (Fannie Mae Selling Guide B3-3.1-04, Verbal verification of employment). For mortgage specifics, see the CPA letter for a mortgage guide.

Fees and turnaround vary by firm. A CPA who did not prepare the returns has no records to confirm, so a same-day letter from a stranger proves little.

1. Get the requester’s exact wording in writing, with its file or loan number.
2. Sign the consent to disclose, naming that recipient and purpose (26 CFR 301.7216-3, Disclosure or use permitted only with the taxpayer’s consent).
3. Send the CPA what the letter will rest on, such as the last two years of returns, Schedules K-1 and Forms 1099-NEC.
4. Expect the CPA to strike any sentence that gives assurance, and to offer copies of the filed returns instead (Journal of Accountancy (AICPA), “Concerns About CPA Letters to Third Parties,” Mar. 2009).

• The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018: A CPA can confirm facts but must not attest to income accuracy; the AT-C 9105 interpretation bars assurance on solvency or debt service; Section 7216 requires written client consent.
• Journal of Accountancy (AICPA), “Concerns About CPA Letters to Third Parties,” Mar. 2009: Preparers rely on client information under Circular 230 § 10.34, need written client permission, should not sign lender-scripted letters, can send the returns instead, and should have their errors and omissions insurer review any letter wording they use.
• 26 CFR 301.7216-3, Disclosure or use permitted only with the taxpayer’s consent: A consent to disclose names the preparer, the taxpayer, the recipient, the purpose and the information, and is signed and dated by the taxpayer.
• Rev. Proc. 2013-14, Internal Revenue Bulletin 2013-3: Sets the mandatory statements, in order, for a Form 1040 filer’s consent to disclose, the one-year default duration, the TIGTA statement, the separate-document rule and, on paper, at least 12-point type with every sheet about that disclosure only.
• Fannie Mae Selling Guide B3-3.5-01, Underwriting factors and documentation for a self-employed borrower: The lender verifies self-employed income with two years of signed returns or IRS transcripts, or one year when the business has existed five years and the borrower has owned 25% or more for five years, and performs its own cash flow analysis when business assets fund the loan.
• Fannie Mae Selling Guide B3-3.1-04, Verbal verification of employment: For self-employment income, the lender completes a verbal VOE no more than 120 calendar days before the note date, by the method most appropriate for the business structure, confirming the business exists.
• PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties: Comfort letters help underwriters build a reasonable-investigation record under section 11; the standard limits the addressees, ties procedures to a cutoff date, sets the representation letter other parties sign, allows negative assurance on interim figures only after an AS 4105 review, and sets the 135-day limit.