(Disclaimer: If you are a CPA for Small Business client whose taxes I have prepared, I have no problem working with you to provide the documentation you need for a mortgage application. This post concerns those who are not clients who ask me to prepare a mortgage lenders letter.)
This month, I have received several calls from individuals who needed a letter from a CPA for a mortgage application affirming that the income they have reported on Schedule C of their 1040 federal tax returns was correct. Schedule C is where individuals report their sole proprietor business profit and loss.
These inquiries were related to what CPA’s call a "CPA Lenders Letter", which is an attempt by a lender to shift the responsibility of verifying an applicant’s income from the lender to the CPA. If the lender suffers a loss as a result of fraudulently reported income by the applicant, the lender can hold the CPA responsible because the CPA provided the income verification.
In the last six months, I have received inquires about lenders letters where I was asked to attest to information that I have no comfort attesting too. Two individuals asked if I would affirm the income they would make in a certain profession if they lived in another city. Another person told me that almost one-half of his income was "under the table" and that this is normal for the industry he worked in. I told this person: (1) I will only provide existing clients with lenders letters, and (2) if he were an existing client I would only be able to attest to the income reported on his tax return and not the "under the table" income.
It is obvious that these individuals need the letter because mortgage lenders are questioning the income reported on the application. Unfortunately, over the last few years some mortgage companies have turned a blind eye to the income applicants are declaring on applications. BusinessWeek recently ran an article entitled "Bonfire Of The Builders" that discussed how applicants income was fraudulently overstated so the mortgage loan would be approved. (I subscribe to BusinessWeek and I highly recommend it to anyone in business)
This is part of the reason the United States is currently experiencing a meltdown in the mortgage industry. Individuals fraudulently inflate their income on a mortgage application, they get a loan, and then *** "surprise" *** they don’t have enough income to pay the note.
What is funny to me about this is that I’ve never had a client ask me to help them overstate income on a tax return. I have never had a client say to me:
"Scot, I’ve been reviewing the tax return you prepared and I don’t think I’m paying enough taxes. Are there any IRS rules that would allow me to knock $10,000 or so off my company’s expenses so I can pay more taxes this year?" <grin>
This is why I am willing to help an existing client with a mortgage application.
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