Enforcement is Coming for the Paycheck Protection Program and Other CARES Act Relief

April 30, 2020 by

Many businesses sought funding from the popular Paycheck Protection Program (PPP) providing loans that could, if certain conditions were met, be completely forgiven. While some businesses successfully obtained funding, unfortunately, many businesses were unable to secure a PPP loan before the first round of funding ran out. A second round of funding is on its way, but now there is controversy over the program. Stories have dominated the news claiming preferential treatment for some borrowers, large businesses receiving the loans designated for small businesses, and expansive interpretation of requirements to obtain funding. The result was Treasury Secretary Steven Mnuchin recently threatening criminal prosecutions and full audits for any loans above $2 million. Many other individuals and businesses have also claimed other CARES Act relief such as other loan programs, tax credits, and payroll tax deferral.

If you received or are seeking a PPP loan, or are claiming other CARES Act relief, here are some things you should know about how eligibility will be scrutinized and violations enforced.

  • Forgiveness will be Scrutinized. It appears clear that the government does not intend to allow forgiveness without checking that taxpayers clearly meet the requirements. As you determine how to spend funds, you must ensure that money is spent on allowable uses (i.e. maintaining payroll, mortgage interest payments, lease payments, utility payments). You must also make sure that money is spent in the appropriate proportion to maximize forgivability (i.e. only 25% can be spent on non-payroll expenses). Also, beware of reductions in forgiveness if employee headcount or employee pay are reduced during the 8-week period. Regardless of whether you are above the $2 million dollar amount, you should maintain all documentation on payroll records, invoices, and utility bills to show the money was spent appropriately.
  • Certifications May Cause Trouble. Application for the PPP loans required multiple certifications regarding why the funds were needed and how the funds will be used. The PPP application also indicates that “knowingly making a false statement to obtain a guaranteed loan from the SBA is punishable under the law” and cites several statutes. In addition to those statutes, applicants can have liability under the False Claims Act. Many applicants completed their paperwork before guidance was issued by the SBA, Treasury, or IRS outlining specifics on definitions and calculations. If those certifications are no longer true, or could be interpreted as untrue, there may be significant risk. The PPP loan paperwork makes it clear that it is the businesses responsibility to ensure eligibility.
  • Investigations Will Happen at Multiple Agencies. The SBA will investigate potential fraud. For example, if average payrolls or headcounts were inflated then there can be criminal liability under the Small Business Act, False Claims Act, or other federal fraud statutes. The CARES Act also created a new Special Inspector General for Pandemic Recovery that will conduct investigations and could refer hundreds of cases to the Department of Justice for criminal prosecution. That’s what happened with relief provided under the previous Troubled Asset Relief Program (TARP). The CARES Act also directs federal investigators to coordinate efforts to detect fraud and abuse and establishes a Pandemic Response Accountability Committee (PRAC). The PRAC involves dozens of agencies, including the SBA, Treasury, IRS, and DOJ. All regulators, both now and for the foreseeable future, will have potential abuse of CARES Act relief on their radar.

Every situation is unique and any investigation will, necessarily, involve an examination of all the facts and circumstances. Also, guidance continues to be released by multiple agencies in response to ongoing questions. If you have questions about your specific situation, please contact a Brown Fox attorney.

Joshua D. Smeltzer

Joshua D. Smeltzer is a tax attorney with over sixteen years of experience representing individuals, corporations, receiverships and formerly the U.S. Government in a variety of tax matters. Mr. Smeltzer uses the first-hand knowledge gained inside the government to both advise and represent clients before and during IRS examinations and when defending tax positions at IRS Appeals or in federal court. He has experience handling individual, corporate and partnership tax disputes involving various tax credits and deductions, reporting and disclosure of foreign bank accounts, individual and corporate tax audits and collection, partnership audits and collection, estate and gift tax audits and collection, cryptocurrency tax issues, summons enforcement and many other tax topics.


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