Could an SBA Paycheck Protection Program Loan Audit Lead to Trouble with the IRS?

Due to widespread fraud under the Paycheck Protection Program (PPP), the U.S. Small Business Administration (SBA) will be auditing many loan recipients at the time they apply for forgiveness through their lenders. These audits have the potential to lead to additional scrutiny from various federal agencies, including the Internal Revenue Service (IRS). If your company is contacted by the IRS with regard to its use of PPP funds, it will be important for you to consult with a Boston tax attorney promptly.

The SBA is Auditing Companies for PPP Compliance

Limited controls to protect PPP funds resulted in substantial fraud under the program. As a result, the U.S. Treasury Department has tasked the SBA with auditing companies for compliance when they submit forgiveness applications to their lenders. According to the SBA’s FAQ for Lenders and Borrowers:

“To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.”

In addition to denial of forgiveness, SBA audits of PPP loan recipients can potentially have additional – and more serious – consequences as well. One of these potential consequences is a referral to the Internal Revenue Service (IRS) and/or the Department of Justice (DOJ) for possible investigation and prosecution.

How Can PPP Loan Recipients Get into Trouble with the IRS?

Companies that received PPP loans face a number of unique considerations when it comes to complying with the Internal Revenue Code (IRC). For example, while PPP loan recipients can defer the deposit and payment of federal employment taxes (i.e. the employer’s share of Social Security tax), those that have had their loans forgiven cannot claim deductions for business expenses paid with PPP funds. As the IRS explains:

“[N]o deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan [under the Paycheck Protection Program].”

With this in mind, companies that obtain forgiveness of their PPP loans will need to update their accounting records to reflect that payroll and other expenses paid with PPP funds are ineligible to be deducted on the company’s federal returns for 2020. Improperly deducting ineligible business expenses, even if done unintentionally, can lead to allegations of federal income tax fraud. These allegations can trigger IRS audits and potentially even lead to investigations by IRS Criminal Investigations (IRS-CI). Penalties for tax fraud include interest and fines for businesses, and business owners accused of intentionally underreporting their companies’ tax obligations can potentially face federal imprisonment.

Speak with a Boston Tax Attorney at Thorn Law Group

Our attorneys represent Boston residents and businesses in all federal payroll and income tax matters. If you have questions or concerns about a matter involving the IRS, we encourage you to call Attorney Kevin E. Thorn, Managing Partner at Thorn Law Group at 617-692-2989, email him at ket@thornlawgroup.com or contact us online for a confidential consultation.