When it comes to the IRS, we have the historical data to determine the statistical odds if a return will be selected for audit. The Paycheck Protection Plan (PPP) is something new, so we do not have historical data. However, the odds are, with over 4.4 million loans amounting to $510.2 billion dollars, there will be some scrutiny. What and when is yet to be determined so it is best to be prepared.
It has been reported that the Small Business Administration (SBA) will audit the PPP loans. There will be investigations by the Special Inspector General for Pandemic Recovery, and reviews by the Pandemic Response Accountability Committee and the Congressional Oversight Commission. The U.S. Department of Justice (DOJ) and State Attorneys General have also announced enforcement initiatives.
On April 28, 2020, Treasury Secretary Steven Mnuchin stated that any business receiving more than $2 million in PPP loans would be audited, and spot checks would be made for smaller loans. On June 1st, an interim rule released declared “the SBA may begin a review of any PPP loan of any size at any time in SBA’s discretion”.
This also means the threat of an audit is not limited to the loan and forgiveness application periods which is why you are instructed to retain your supporting documents for six years after the loan is fully forgiven or fully repaid.
So how do you prepare for a PPP audit? The same as with any other audit: good records = good audit. It is much easier and more efficient to compile your documentation as you go rather than trying to recreate or find it later when you get the notice. Keep in mind, contemporaneous documentation in some cases is required and in most cases is more highly regarded.
YOUR PPP FILE SHOULD INCLUDE:
The PPP loan application included a certification, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The Paycheck Protection Program FAQ 46 announced a safe harbor that “will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment, than borrowers that obtained larger loans.”
If your loan was over $2 million you will need to document your need for the loan. Certifications found to be inaccurate or untrue are punishable under criminal and civil law. However, the SBA will not report the applicant to any other federal agency if, when deemed to not have certified in good faith that the funds were needed, they are repaid in full. Use historical financial information, budgets, and projections to document both evidence and analysis that demonstrate the necessity of loan funds to support ongoing operations. Include in your documentation the sources of funds, and projected use over the loan period. Be sure this documentation is consistent with the amounts in your loan and forgiveness applications.
If you need help, we are here for you. At ADKF we have put together an expert PPP team to assist with loan calculations. We also have a Department of Tax Controversy that can review your documents or perform a mock audit if that is the level of reassurance you desire. Call us to learn more about our services: 210-829-1300.