Most of us haven’t even heard the term comfort letter, let alone its definition. A comfort letter is written by CPAs for both individuals and companies and often reinforces a status to a lender or investor. Here, you’ll find out more about this type of letter along with comfort letter examples.
What Is a Comfort Letter?
Basically, a comfort letter for a private individual is verification by a tax professional stating they did prepare a person(s) income tax return for a certain year or years. For a business or company, a comfort letter example would include much more such as attesting to the auditing of all the financial records of the business.
Depending upon the type of comfort letter a lender or investor requests, you’ll need to give written permission to the accountant in order for them to initiate and send the letter.
Often, if an individual owns a sole proprietorship and is looking for a bank or home loan, a lender or bank may request a comfort letter even though they are given a tax return by the individual.
The purpose of a comfort letter, in the eyes of a lender or investor, is to guarantee or attest to certain financial items or tax preparation; however, more and more Certified Public Accountants (CPAs) are minimizing comfort letter efforts due to possible liability involved.
Individual Letters of Comfort
A comfort letter example for an individual can be found in our Media Gallery and offers the following information to the person or organization requesting the letter:
Date written Person or organization and address of requestor Verification of preparation of tax returns for years prepared Tax professional attest to following guidelines of the Internal Revenue Service Tax professional attests that tax return(s) were prepared by information given by the client Paragraph stating tax professional’s letter of comfort should not be the total basis a lender or investor should use a verification that the person(s) is credit worthy.
More detailed comfort letters that are really more of a true audit of a person(s) income and expenses can be requested to be written by a tax professional. One must consider the amount of time and costs this type of letter would incur, however. Keep in mind that most tax professionals charge by the hour and to verify all your financial information may take quite some time and that doesn’t include a full audit of your financial records.
Business Letters of Comfort
If a business requires this type of letter, a comfort letter example for a business can also be found in our Media Gallery. This letter may be more entailed especially if a company is searching for investors or seeking major business funding.
Again, most CPAs will not guarantee what is contained in the letter of comfort unless they perform a full blown audit of a business, not just tax preparation. Some items that may be included in a business letter of comfort would be:
Audit of cash flow Audit of income and expenses Balance sheet reconciliations General ledger audits Owner equity audits
Here again, the business must provide the CPA with written request to prepare a comfort letter and because they consist of performing an audit to be accepted as a comfort letter, they can be quite expensive.
In some circumstances, with smaller businesses, a lender may just want to know if by utilizing a certain amount of cash for a large purchase or down payment on a loan would harm the company’s cash flow. These types of comfort letters are more inexpensive and only require a review of the company’s cash flow.
In either situation, both individual and business comfort letters are not as widely utilized as in the past, nor are tax professionals willing to attest that everything on your tax return should be considered 100% accurate.
If a lender or investor requests you provide a comfort letter, speak with your CPA or tax professional on the types of comfort letters they can offer along with the rates they charge for each type.