Could My Small Business Get Audited for a PPP Loan?

Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes the Paycheck Protection Program (PPP), at the height of the pandemic. At the cost of almost $2 trillion, it sought to help save workers and businesses from economic hardship.

Pandemic relief fraud investigations are now happening. There has been an uptick in criminal and False Claims Act (FCA) investigations related to loan funds borrowed through the PPP program.

This article discusses the SBA’s PPP Loan Program, increased collection efforts for delinquent pandemic relief loans, and how to prepare if audited in connection with a PPP loan or forgiveness.

What Is the Paycheck Protection Program?

After COVID-19 caused widespread disruption to businesses across the country, Congress attempted to give some relief by passing the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes the Paycheck Protection Program.

The PPP is a federal short-term loan program through the Small Business Administration. It encourages employers to keep their employees on the payroll. The SBA loans qualify for PPP loan forgiveness if the borrower meets eligibility requirements.

Business owners can use PPP loan proceeds to cover payroll costs such as:

• Wages
• Salaries
• Paid time off
• Health benefits

Qualifying expenses also include costs for ongoing operations during the covered period, including the following:

• Business mortgage interest payments
• Utility payments
• Rent

The SBA issued 11.5 million loans to businesses through the PPP.

When Can a PPP Audit Happen?

The Small Business Administration (SBA) can audit your company if it got assistance under this program. An audit is within the SBA’s discretion. The SBA has broad authority to conduct audits to ensure loan requirements and eligibility compliance. An SBA and Treasury Department Interim Final Rule authorizes the SBA to audit all PPP loan borrowers’ compliance with loan requirements. The SBA may review a PPP loan anytime, including reviewing tax filings.

Loans over $100,000 have gotten the most attention for audits. But, audits have increased for loans of all sizes, including those for small businesses.

At the close of 2023, the SBA indicated it was stepping up efforts to review and verify PPP loan compliance. Loans of all sizes are subject to audit, and the SBA has the authority to audit a PPP loan that has already gotten forgiven.

PPP Loan Audits Affecting More Borrowers

From the close of 2023 to the present, the SBA has intensified its examination of PPP loans to ensure fidelity to the PPP. This change requires businesses to expect more examinations. The SBA seeks to ensure compliance with past forgiveness requirements. This increased scrutiny demands preparation for a more rigorous and comprehensive evaluation of financial records.

The U.S. Department of Justice (DOJ) issues press releases on investigations and sentencing of COVID-19 fraud prosecutions. The DOJ is serious about combating pandemic relief fraud. In 2023, it created more COVID-19 fraud enforcement strike forces.

Small Businesses Affected by the Surge in SBA Requests

Many small business owners need clarification and guidance with the Paycheck Protection Program’s (PPP) loan forgiveness application process.

Some businesses that went through the PPP loan application process were uncertain about the following:

• Eligible expenses
• Required loan documentation
• The covered period
• Repayment

Some small business owners who got loans wonder if they will be subject to a PPP audit for compliance based on how their businesses used PPP funds.

In early 2024, the SBA referred around $20 billion in delinquent PPP loans to the Treasury Department for collection. These loans had balances of less than $100,000. Around 10,000 PPP loans involving higher balances have already been submitted.

All businesses, including small businesses, must stay updated on the SBA’s loan forgiveness criteria and other PPP loan-related issues. It’s critical to meet and surpass any standards in this environment of increased scrutiny.

PPP Loan Reviews Are Ongoing

The PPP has faced criticism after disclosing that many big businesses, including private-equity-backed chains, were given millions in forgivable loans. The U.S. Department of Treasury increased audits to ensure businesses applied and participated in good faith. This is ongoing.

The SBA’s Office of Inspector General (OIG), the agency’s oversight office, conducts the audits. The OIG looks for issues such as:

• Did the business receiving the loan meet eligibility criteria?
• Did the business follow the guidance that was in place when the loan was approved?
• Did the business get the correct loan amount?
• Did the business use the loan for eligible expenses?
• Is the business eligible for the forgiveness amount claimed?

The OIG will likely examine a business’ payroll records and expenses to ensure that the business complied in good faith and that the information provided was accurate.

Do Not Ignore an SBA Audit Inquiry

Borrowers must respond to an SBA audit inquiry. If a borrower fails to respond to an SBA audit inquiry, the SBA may determine that the borrower was:

• Ineligible to receive the PPP loan
• Ineligible to receive the amount of the PPP loan
• Ineligible to receive the loan forgiveness amount claimed

Borrowers who fail to respond to an SBA inquiry may need to repay the outstanding PPP loan balance. If the borrower gets an unfavorable audit, they may appeal the decision with the SBA’s Office of Hearings and Appeals.

Be Prepared for an Audit

Do you think you made a mistake or are out of compliance with PPP loan requirements?

Businesses often wonder what could happen due to non-compliance. Does it matter if the mistake was intentional or unintentional? Honest PPP mistakes are common. This is especially true considering that the rules have changed many times since the start of PPP loans. If you worry about mistakes, you are not alone.

If it turns out that you did not qualify for a PPP loan or did not spend the loan on the appropriate expenses, the SBA may seek repayment. Cases of actual fraud are subject to criminal or civil liability.

For example, headcount reductions will not reduce the forgiveness amount when reviewing compliance requirements. Generally, if employers make a good-faith effort to bring back employees, but they refuse to return, the employer will not be penalized.

Maintain Documentation Establishing PPP Eligibility

Businesses with PPP loans should keep documentation supporting their eligibility to receive loans. The borrower should keep all supporting documents and financial statements.

Documentation should show that the company used the loans as required under the CARES Act. This allows the company to address requests for additional information during an SBA audit. Maintaining documentation is always critical. But, it is crucial when subject to audits or investigations.

If Your PPP Loan Is Under Review

When the SBA decides to conduct an audit, it notifies the lender. The lender provides notice to the borrower within five business days. When your business receives notice, work with an attorney to compile the documentation. This documentation, likely requested during the audit, includes:

• The borrower’s records from the date of the receipt of the PPP loan
• The borrower’s records for six years after the PPP loan was repaid or forgiven
• Copies of all PPP loan documentation
• All internal documentation and correspondence related to the PPP loan
• All the borrower’s financial records relating to and evidencing the borrower’s lack of access to other forms of funding
• All the borrower’s documentation demonstrating the borrower’s need for access to funding from the PPP loan
• Copies of all the borrower’s correspondence with the PPP loan lender

If you find out that your PPP loan is under SBA review, help is available. Your accountant or small business lawyer can help you gather the necessary information for the review.

Get Help With Questions Related to PPP Loans

Developments related to the PPP program are ongoing. Contacting a CPA or attorney can help you stay alert to developments from the IRS, Congress, and the White House.

If you have questions about ongoing developments or need help with an SBA PPP loan audit, contact an experienced small business attorney. A qualified professional can help verify business records and ensure accurate and compliant responses to SBA requests. Getting help can contribute to a smooth forgiveness process or help you through the SBA appeal process.