By: Jim Hoover, Burr & Forman
PPP loans received by individuals and businesses under the CARES Act will be audited (“reviewed”) by the SBA. PPP loans of $2 million or more will automatically be audited by the SBA. Many PPP loans of less than $2 million will also be audited.
Borrowers will often receive notification of the audit through their lending bank, but the SBA is directly notifying PPP borrowers as well. The SBA is receiving support from the Internal Revenue Service and other federal agencies in these audits such as the Department of Justice. There have been several criminal investigations resulting from these audits.
PPP loan audits request documents and information from the borrower, including income and employment tax returns, payroll records, financial statements, and bank account statements including deposit and payment information in order to verify information reported by the borrower on its PPP loan application. However, the SBA PPP loan audits focus on much more.
SBA audits of PPP loans have thus far focused on whether the individual or business was eligible to receive a PPP loan, and whether the borrower correctly calculated its PPP loan amount. Specific issues being reviewed by the SBA in these audits include “economic necessity” for a PPP loan, and “head-count” related issues including affiliation with other businesses, the appropriate “NAICS” code for the business, and whether the business counted all employees – full-time, part-time, and even temporary – in filing the loan application. The SBA is also looking at other “business-specific” issues of the borrower.
The PPP loan application contains a borrower certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant“. This same certification is also required in new PPP loan applications under the “Economic Aid Act”. For borrowers that received PPP loans of less than $2 million, the borrower is deemed by the SBA to have made this “economic necessity” certification in “good faith.” As a result, the SBA may not be looking specifically at this issue for borrowers that received loans of less than $2 million. However, for PPP loans of $2 million or more, borrowers are not eligible for this “good faith economic necessity presumption”, and the SBA is auditing this certification issue.
Without being an alarmist, false certifications is the keystone issue for most False Claims Act prosecutions. Accordingly, it is important for borrowers to carefully review and gather the documentation that supports the certification.
The SBA is beginning many audits by sending out a “Loan Necessity Questionnaire” (SBA Form 3509), which the SBA first sends to the lending bank and then the bank sends the questionnaire to the borrower. The borrower has a limited amount of time, 10 days, to complete and return the questionnaire to the bank, and the bank then provides the completed questionnaire to the SBA.
If a borrower applies for forgiveness of a PPP loan, the forgiveness application may be separately reviewed by the SBA and, as a practical matter, if a borrower files for forgiveness this will likely trigger or at least accelerate a full SBA audit of the PPP loan.
Once an SBA PPP loan audit is completed, and where an adverse audit determination is made by SBA, including that the borrower may not qualify for the loan, the borrower then has administrative appeal rights within the SBA to have the audit determination reviewed, which can lead to a hearing before a federal administrative law judge. Those appeal rights are the subject of a future article.
Jim Hoover is a partner at Burr & Forman LLP and works exclusively within the firm’s Health Care Practice Group and predominantly handles healthcare litigation. Burr & Forman has a dedicated team to counsel individuals and businesses in government audits, investigations and defense-related to the PPP under the CARES Act, and also new PPP loans under the Economic Aid Act. The PPP and CARES Act Audit, Investigations and Defense Team represents and advises clients in audits and investigations involving PPP loans and tax benefits that may have been claimed under the CARES Act. This multidisciplinary team combines more than 230 years of legal experience and attorneys with previous government positions, including attorneys with IRS Chief Counsel, the United States Department of Justice, and United States Attorneys’ Offices. More information can be found at www.burr.com.