CPA letter of explanation with 3 samples

CPA Letter of Explanation: Everything You Need to Know

A CPA letter of explanation is a formal document prepared by a Certified Public Accountant (CPA) to clarify or provide detailed information on financial statements, tax returns, or other financial activities. This letter plays a crucial role in financial and legal situations, as it addresses discrepancies, confirms compliance, or explains financial transactions that could appear unusual or complex. Understanding when and how to use a CPA letter of explanation can make a difference in various financial processes, including tax audits, mortgage applications, and more.

What is a CPA Letter of Explanation?

A CPA Letter of Explanation is an official document prepared by a Certified Public Accountant (CPA) to clarify or add context to specific financial information for individuals or businesses. Often requested by third parties like lenders, landlords, tax authorities, or regulatory agencies, this letter helps explain financial details that may not be immediately clear from financial statements or tax returns.

A CPA Letter of Explanation provides a trusted, professional overview to ensure that financial data is clear and compliant with relevant guidelines, reducing misunderstandings and helping the requester make informed decisions.

When is a CPA Letter of Explanation Required?

• Mortgage Applications: Lenders often require a CPA letter to clarify self-employed income sources, unusual transactions, or large deposits.
• Apartment Rentals: Landlords use CPA letters to confirm income for tenants with freelance or irregular income sources.
• IRS Audits: The IRS may request a CPA letter to verify or clarify tax return discrepancies or large deductions.
• Business Loan Applications: Business lenders may request a CPA letter to confirm business finances or explain unusual accounting entries.
• Tax Return Clarifications: A CPA letter of explanation can clarify any inconsistencies on a tax return to avoid penalties or delays.

For similar documentation needs in real estate, see our Mortgage borrower Checklist for guidance.

How to Write a CPA Letter of Explanation: Step-by-Step Guide

Step 1: Understand the Purpose and Audience

• Identify why the letter is needed: mortgage, tax, or rental clarification.
• Tailor tone to the audience. Use a professional tone for lenders or tax authorities.

Step 2: Use Official Letterhead

• Use the CPA’s letterhead with full contact details for credibility.

Step 3: Start with a Clear Introduction

• Include the date and address the letter formally.
• Introduce yourself as the CPA and state your relationship with the client.

Step 4: State the Purpose Clearly

• Explain the purpose briefly. Example: “This letter clarifies income for mortgage approval.”

Step 5: Provide a Detailed Explanation

• Outline details related to the financial matter.
• Address income stability, unique transactions, or business expenses as needed.
  • Income Verification: Note steady income or fluctuations, if applicable.
  • Unusual Transactions: Describe large deposits (e.g., inheritance or asset sale).
  • Business Expenses: Explain regularity and purpose for tax purposes.

Step 6: Reference Supporting Documents

• Mention any attached documents, like tax returns, statements, or invoices.

Step 7: Summarize and Conclude

• Restate the client’s financial credibility in one sentence.
• Add: “Contact me for further questions at [contact info].”

Step 8: Professional Sign-Off

• Close formally with “Sincerely.”
• Add CPA’s name, designation, license number, and contact information

If you’re new to financial documentation, reviewing CPA review courses online by Eduyush for a more in-depth understanding of CPA responsibilities may also be helpful.

Sample CPA Letters of Explanation for Different Scenarios

Sample 1: Explanation for a Mortgage Application

To Whom It May Concern,

Re: Letter of Explanation for Mortgage Application – [Client’s Full Name]

I am writing on behalf of my client, [Client’s Full Name], whom I have represented as a Certified Public Accountant for [duration, e.g., “several years”]. This letter provides clarification on financial aspects relevant to [Client’s Name]'s mortgage application, specifically regarding [reason, e.g., “income stability,” “large deposit(s),” or “one-time expenses”].

Overview of Client’s Financial Situation

Income Verification

[Client’s Full Name] derives their income primarily from [describe the source, e.g., “self-employment through a consulting business,” “commission-based earnings,” or “partnership income”]. I have reviewed their financial records for [relevant years, e.g., “the past two years”]. I can confirm that [income trend, e.g., “their income has shown consistent growth,” or “there are seasonal fluctuations typical for their industry”].

Explanation of Income Fluctuations

During [specific period, e.g., “the last 12 months”], [Client’s Name] experienced [describe any unusual income pattern, such as “a temporary decrease in income due to economic impacts on their industry” or “a significant increase in revenue from a large client contract”]. This fluctuation is documented in [supporting documents, e.g., “recent tax filings,” “bank statements,” or “financial statements”].

Details on Large Deposits or Withdrawals (if applicable)

[Client’s Full Name] has made several large deposits/withdrawals in the past [period, e.g., “six months”] due to [reason, e.g., “a sale of personal assets,” “a gift from family members,” or “business revenue allocations”]. These transactions are fully documented and align with the nature of [Client’s Name]'s income and asset profile. Supporting documents, including bank statements and transaction summaries, are available for review.

One-Time or Unusual Expenses

Additionally, [Client’s Name] incurred one-time expenses in [Year, e.g., “2022”] for [reason, e.g., “business expansion, medical costs, or relocation expenses”]. These are not recurring and have no ongoing impact on [Client’s Name]'s financial standing or ability to make mortgage payments.

Verification and Supporting Documents

The financial data provided by [Client’s Name] aligns with their tax returns and other supporting documents, which include:

• Federal and state income tax returns for [years]
• Profit and loss statements and bank statements for [specific periods]
• Documentation of large deposits and withdrawals, if applicable

Conclusion and Client’s Financial Viability

Based on my review and understanding of [Client’s Name]'s financial records, I can confirm that [they have maintained a stable income stream / their earnings pattern is consistent with their industry]. These clarifications are intended to support [Client’s Name]'s mortgage application and to provide assurance regarding their ability to meet mortgage obligations.

Attached is supporting documentation verifying the source, including a signed Mortgage Gift Letter Template. 

Please get in touch with me at [CPA’s phone number and email] if you require further details or have additional questions.

Sincerely,
[CPA’s Full Name]

Sample 2: Explanation of Business Expense for Tax Purposes

To Whom It May Concern,

Re: Explanation of Business Expenses for Tax Filing – [Client’s Full Name / Business Name]

I am writing on behalf of my client, [Client’s Full Name or Business Name], who has engaged my services as a Certified Public Accountant to provide tax preparation and advisory services. This letter outlines specific business expenses in their recent tax filings to clarify their relevance and appropriateness for tax purposes.

Overview of Business and Expense Relevance

[Client’s Business Name] operates as a [describe nature of the business, e.g., “consulting firm,” “retail business,” “freelance design business”], and the following expenses were incurred as part of regular business operations. Each expense category has been reviewed and validated as an ordinary and necessary cost for the business's functionality and revenue generation.

Expense Categories and Justifications

Travel Expenses: [Client’s Name] incurred travel expenses for [purpose, e.g., “meeting clients,” “attending industry conferences,” or “onsite consultations”]. These expenses include transportation, lodging, and meals, all directly related to business activities and necessary for maintaining client relationships and professional growth.

Office Supplies and Equipment: Purchases categorized under office supplies include items like [list examples, e.g., “stationery, printers, computers”]. These are essential for daily business operations and have been recorded as deductible expenses due to their ordinary and necessary use in [Client’s Name]'s business operations.

Marketing and Advertising Costs: To enhance business visibility and client acquisition, [Client’s Name] invested in marketing services, including [types of marketing, e.g., “digital advertising, social media campaigns, and printed materials”]. These expenses are crucial for business growth and are standard within the industry.

Professional Fees and Subscriptions: As part of staying current with industry standards, [Client’s Name] incurred fees for [specific memberships or subscriptions, e.g., “professional memberships, industry-specific software, and trade publications”]. These are regular and necessary expenses to maintain professional licensure, industry compliance, and competitive standards.

Employee or Contractor Payments (if applicable): Payments to employees and contractors for [describe work, e.g., “project support, administrative assistance”] are in line with industry norms and contribute directly to revenue-generating activities. Documentation for each payment has been maintained to substantiate their role in business functions.

Documentation and Record-Keeping

[Client’s Name] has maintained records for each expense, including receipts, invoices, and related documents, all available for verification. These records confirm that each expense aligns with IRS business deductions requirements, meeting the ordinary and necessary standards.

Conclusion

The expenses listed in [Client’s Name]'s tax filing are ordinary, necessary, and directly related to the operations of [Client’s Business Name]. Should further documentation or clarification be needed, please get in touch with me directly at [CPA’s phone number and email].

Thank you for your attention to this matter.

Sincerely,
[CPA’s Full Name]  

Sample 3: Letter of Explanation for Rental Application 

To Whom It May Concern,

Re: Letter of Explanation for Rental Application – [Client’s Full Name]

I am writing on behalf of my client, [Client’s Full Name], who has engaged my services as a Certified Public Accountant to assist with their financial and tax matters. This letter provides verification and clarification of [Client’s Name]'s income and financial standing in support of their rental application.

Overview of Client’s Financial Stability

Income Verification

[Client’s Full Name] is employed/self-employed as a [profession, e.g., “freelance graphic designer,” “consultant,” or “sales manager”] and has maintained a steady income. I have reviewed their financial records for the past [number of years, e.g., “two years”], and I can confirm that their average monthly income is approximately $[amount], which provides sufficient resources for their rental obligations.

Consistency of Income

Although [Client’s Name]'s income may vary slightly month-to-month due to the nature of [industry, e.g., “freelance work,” “commission-based work,” or “project-based consulting”], it has remained consistently stable over time. This income pattern is typical for their profession and shows no signs of instability.

Savings and Additional Financial Resources

In addition to regular income, [Client’s Name] has [mention any additional sources of funds, e.g., “a stable savings account with a current balance of approximately $X,” “investment income,” or “a family trust”]. These resources further ensure their financial ability to consistently meet rental payments.

Explanation of Any Notable Financial Activity (if applicable)

Recently, [Client’s Name] may have [mention any relevant activity, e.g., “made a large deposit,” “paid off personal debt,” or “purchased business equipment”]. This was a one-time transaction and does not affect their ongoing financial standing or ability to meet monthly rental obligations.

Supporting Documents Available

 [Client’s Name] has provided financial documentation supporting their application, which includes:

• Income tax returns for [years]
• Recent bank statements
• Profit and loss statements (if self-employed)
• Documentation of any large deposits or one-time financial events

Conclusion

Based on my review of [Client’s Name]'s finances, I confirm that [they can maintain monthly rental payments]. Their income and financial resources demonstrate consistent reliability, supporting their rental application.

Please feel free to contact [CPA’s phone number and email] with any further questions or documentation requests.

Sincerely,
[CPA’s Full Name]

These templates provide a basic structure for drafting CPA letters explaining financial events. Check out our Insured Closing Letter Guide for tips on structuring similar financial documents.

Practical Tips for Drafting a CPA Letter of Explanation

• Stay Factual: Use data and clear language, avoiding personal opinions.
• Be Transparent: Transparency builds trust and shows compliance with financial laws.
• Use Simple Language: Ensure clarity by avoiding overly technical terms.
• Review Before Sending: Double-check for accuracy and that all required documentation is attached.

For more templates on similar letters, our Emotional Support Animal Letter Template and Notarized letter for apartment offer customizable approaches for various needs.

Final Thoughts

A CPA letter of explanation can make a substantial difference in how your financial matters are processed and understood. Whether clarifying a one-time transaction for a mortgage or addressing a tax discrepancy, a well-structured, factual letter can smoothen many financial processes. Ensure accuracy and detail, as minor inconsistencies can lead to delays or additional questions.

For more information on documents often used in financial contexts, check out our guides on 40+ Year Mortgages: Pros and Cons and the Acord 80 Form Overview.