Hello;
I want to share information on potential risks involving the filing of a withholding certificate which not only takes between 12 to 15 months to get processed by the IRS, whether involves rejecting the request or reducing the withholding amount, some of you have asked if a CPA can hold the funds while the withholding certificate is being processed by the government, so this is our viewpoint on this matter.
While a CPA could potentially act as an escrow agent, it's a complex situation with significant risks. It is highly recommended that the seller seek other options. The seller should consult with the settlement agent to see if they will agree to use a third-party escrow company. The CPA should not agree to act as escrow agent without thorough legal and tax advice specific to this situation and a clear understanding of all the implications. The risks are substantial.
Generally, a CPA can act as an escrow agent, but there are many factors to consider. Here's a breakdown of the issues involved:
Key Considerations:
- State Licensing Requirements: States have varying regulations regarding who can act as an escrow agent. Some states require specific licensing or bonding. A CPA's license to practice accounting does not automatically qualify them to act as an escrow agent. They would need to check the specific requirements in the relevant state (where the property is located). Texas, for example, has specific licensing requirements for escrow agents.
- Professional Liability: Acting as an escrow agent creates significant liability. If funds are mishandled, the CPA could be held personally liable. Their professional liability insurance as a CPA might not cover escrow activities. They would need to obtain separate E&O insurance. They should consult with their insurance provider.
- Client Consent and Engagement Letter: The CPA must have explicit written consent from all parties involved (buyer, seller, and potentially the settlement agent) to act as escrow agent. A detailed engagement letter is essential, outlining the terms of the escrow, including:
- The purpose of the escrow
- The amount to be held
- The conditions for disbursement
- The fees charged by the CPA (if any)
- The responsibilities of each party
- A clear statement that the CPA is acting as an escrow agent only and is not providing tax advice in this role.
- Segregation of Funds: Escrow funds must be kept completely separate from the CPA's operating funds. A dedicated escrow bank account is absolutely required. Commingling funds is a major ethical and legal violation.
- Tax Implications for the CPA: While the seller is ultimately responsible for the tax withholding, the CPA, as escrow agent, has a fiduciary responsibility to handle the funds correctly. They need to understand the potential tax implications for themselves of holding these funds.
- Independence Issues: If the CPA has a pre-existing relationship with either the buyer or the seller, acting as escrow agent could create a conflict of interest or the appearance of a lack of independence. This needs to be carefully considered.
Make sure you are well informed to make the best decision always with the support of a licensed tax professional well versed in FIRPTA matters.
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Mary Enzi CAA
Tax Solutions – FIRPTA Consulting
[email protected]+1 (281) 578-1040
Katy TX
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