Report: More Than 10 Percent of All PPP Loans Show “Signs of Possible Fraud”

As we discussed in September, the Internal Revenue Service (IRS) and its criminal Investigations division (IRS CI) are continuing to target fraud under the federal Paycheck Protection Program (PPP). The IRS issued guidance in August clarifying that taxpayers who improperly claim loan forgiveness cannot exclude their PPP loans from their gross income, and IRS CI announced multiple criminal cases targeting PPP loan recipients in August and September.

Now, a new report suggests that approximately 1.4 million PPP loans – more than 10 percent of the 11.4 million loans issued – show “signs of possible fraud.” This is likely to enhance the IRS’s and IRS CI’s focus on PPP loan recipients, with particular attention being paid to loan recipients’ forgiveness certifications.

“Virtually All PPP Loans Have Been Forgiven with Limited Scrutiny”

A recent NPR article cites this new report, noting that it contrasts with the U.S. Small Business Administration’s (SBA) estimate that “at least 70,000 loans were potentially fraudulent.” The NPR article also notes that, to date, the SBA has closely scrutinized “just a tiny portion of the millions of PPP loans for fraud and forgiveness eligibility.”

The report itself identifies several “signs of possible fraud,” including suspiciously high payroll expenses and applications submitted on behalf of multiple businesses listed at the same residential address. Based on the authors’ analysis, the report concludes that “[s]uspicious loans are being overwhelmingly forgiven at similar rates to other loans.”

At present, paycheck protection program loan recipients that have obtained forgiveness from the federal government are not in the clear. As the title of the NPR article indicates, “[v]irtually all PPP loans have been forgiven with limited scrutiny.” As the IRS, IRS CI and other federal authorities continue to review PPP loan recipients’ forgiveness certification, it is likely that many more will come under scrutiny—and potentially face audits or criminal fraud investigations carrying the potential for significant penalties.

What Should Taxpayers Do If They Have Received PPP Loan Forgiveness?

Given the “unprecedented fraud levels” under the PPP, what should loan recipients do to protect themselves from federal scrutiny? For those that have already received loan forgiveness, it may be advisable to review their loan applications and forgiveness certifications to reassess whether they have fully complied with the program’s requirements. For those that have not yet submitted forgiveness certifications, it will be imperative to make an informed decision about certifying—and not simply seek forgiveness assuming that no one is paying attention.

In any case, it is best to address any mistakes proactively, as allowing the IRS or IRS CI to uncover fraud on their own initiative can have far more serious consequences. Taxpayers that have made mistakes have options available, but they must act carefully to avoid triggering unnecessary scrutiny and penalties.

Request a Consultation with Tax Attorney Kevin E. Thorn in Boston, MA

Tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, represents individuals and businesses in all federal tax matters. If you have concerns about facing scrutiny from the IRS or IRS CI related to a PPP loan, you can call 617-692-2989, email ket@thornlawgroup.com or contact us online to arrange a confidential consultation.