A CPA receives a request from a client to provide a letter to the client’s mortgage broker, lender, adoption agency, or other third party. The request seems simple enough and harmless. All the client asks is that the CPA verify that this is her client, that she has been preparing the client’s income tax returns, and that the client is employed by a particular employer or is self-employed. Is there any harm in the CPA signing the client’s suggested letter or writing one of her own?
CPAs should remember that they prepare tax returns based on information provided by the taxpayer. It is very likely that they did not audit or otherwise verify the information used in the preparation of the returns. In fact, Circular 230 affirms that the CPA, in preparing a tax form:
[M]ay rely in good faith without verification upon information furnished by the client” but “may not ignore the implications of [other] information . . . actually known” by the CPA, and he or she must make reasonable inquiries if the information provided “appears to be incorrect, inconsistent . . . or incomplete (Circular 230 §10.34(d)).
In addition, disclosing your client’s tax information to 3rd parties or government agencies other than the IRS or use of their information for purposes other than the preparation of their return may require client consent under section 7216 of the internal revenue code.
In April 2012, the Farm Service Agency (FSA) started sending letters requesting “certification” of income as an alternative to providing an actual return as part of their loan renewal or qualification process. The AICPA immediately engaged in a discussion with FSA to clarify the definition of “certification” for this purpose, since the due diligence requirements under Circular 230 and the AICPA Statements on Standards for Tax Services do not rise to this level. In response, the Tax Practice Responsibilities Committee developed the FSA Certification Letter Guidance web page to provide comprehensive information and resources regarding these letters.
Professional standards prescribe what CPAs can and cannot do in these circumstances, and there are professional risks to signing these “comfort” letters or any other request for “certification” of tax return information. The third parties requesting these letters are not the CPA’s clients. Tax preparers therefore should not convey any information to anyone without their clients’ written permission. This is a requirement under professional ethics standards, the Gramm-Leach-Bliley Act, the Internal Revenue Code, and other federal and state privacy statutes and regulations.
Additional AICPA Resources:
The AICPA would like to know more about the types of third-party verification requests you’re receiving and we’re here to help answer your specific concerns. Please email us at verifications@aicpa.org for more information.