Consider This Before Writing Comfort Letters

Sep 14th 2018
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Once upon a time, before the 2008 housing crisis, EAs, CPAs and accountants were asked to write letters for clients so they could purchase a home or get a loan. At the time, these letters seemed harmless: They usually verified self-employment, income and similar items. After a while, however, they began to border on the bizarre.

I can remember a mortgage broker asking me to write a letter stating that a client had access to all the money in their business account.  When the housing crisis came, lenders were looking for people to blame for foreclosures or mortgages that were in default. A lot of underwriters would point to these letters, saying they relied on the accountant. 

Long story short, many accountants were sued, and some went out of business because they couldn’t afford to pay the judgment. As for me, I realized I needed to put all my transactions in writing.

In 2013, I began using formal agreements for any engagement I did, from accounting services to tax return preparation. These spelled out what I was going to do for the client, the cost and what my services entailed.  My errors and omissions insurance provided the outline for the agreements, and I just put my own spin on them. 

For example, in my engagement letter for tax return preparation, I have a section stating what my services do not include. For example, if a client doesn’t give me a 1099 or W-2 and a CP-2000 notice comes, there is an extra charge for me to respond. The original fee does not include working with a mortgage broker on a loan or a comfort letter.

Why do I add this verbiage to my engagements?  I used to think answering an IRS letter or working with a mortgage broker was just an extension of my tax return preparation services. However, when you think about it, you can literally spend an entire day writing letters, sending tax returns (many of which you already sent to the client) and being on the phone straightening out a problem your client created for themselves.  And, unfortunately, they inevitably will blame you if they get a notice, even if the information wasn’t provided to you.

Which brings me back to comfort letters. It seems banking regulations have loosened again, and I am asked more and more to write all kinds of weird letters to satisfy underwriters. 

So, I went back to my insurance company, and they gave me a template.  For the most part, it states that I prepared the tax returns from the information I was given. I did not independently verify said information, and, basically, what you see is what you get. I charge a nominal fee for these letters and the time I spend with the mortgage broker.

I actually ended up dropping a client this year over a comfort letter. I have been doing this person’s tax return for 20 years or more. In 2017, for the first time ever, he showed only $13,000 in income. I went over the return with him when I was finished with it, and he verified that all he made was $13,000.  When I asked him what he lived on, he said savings.

Low and behold, he wants to buy a house, and, all of the sudden, his wife collected $55,000 on an installment note he had told me nothing about. He wanted me to amend the return showing this installment and write a comfort letter. I explained to him that we went over the return before it was filed, and he said all he made was $13,000. I did my due diligence, and now there is additional income. If he lied to me about that, what else is he willing to lie about? To make matters worse, he attempted to blame me for missing the $55,000, although it wasn’t reported on anything he provided.

So, in conclusion: You may think that writing a letter is an extension of your tax return preparation fee, but it really isn’t. Make sure you get paid for the time you spend working with clients and protect yourself even as you try to help them. 

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