PPP loans received by individuals and businesses under the CARES Act will be audited ("reviewed") by the SBA. The new Economic Aid Act also requires the SBA to submit a forgiveness audit plan within 45 days after enactment and report updates every 30 days thereafter. Additionally, the Economic Aid Act now allocates $50 million for PPP audits and fraud mitigation efforts. PPP loans of $2 million or more will automatically be audited by the SBA. Many PPP loans of less than $2 million will be audited as well.
PPP loan audits are being handled by the SBA. Borrowers will often receive notification of the audit through their lending bank, but 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, which can also involve criminal investigations.
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 the PPP loan application. However, SBA PPP loan audits focus on much more.
SBA audits of PPP loans have already begun and focus on whether the individual or business was qualified to receive a PPP loan (i.e., eligibility), and whether the borrower correctly calculated its PPP loan amount. Specific issues being reviewed by 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" and, as a result, the SBA may not be specifically looking 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 will audit this issue.
To aid its audit efforts, the SBA requires each for-profit borrower that received a PPP loan in excess of $2 million to complete a "Loan Necessity Questionnaire" (SBA Form 3509). The SBA states that the "information collected will be used to inform SBA's review" of the "economic necessity" certification. The borrower has a limited amount of time, 10 days, to complete and return the questionnaire to the lending bank, and the bank then provides the completed questionnaire to the SBA.
If a borrower applies for forgiveness of a PPP loan, the SBA has 90 days to review the forgiveness determination made by the lending bank. As a practical matter, if a borrower files for forgiveness this may trigger or at least accelerate a full SBA audit of the PPP loan.
Once an SBA PPP loan audit is completed and 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.
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