SBA PPP Loan Paperwork

The Small Business Administration (SBA) has forgiven over 98% of the total Paycheck Protection Program (PPP) loan value that borrowers requested them to forgive; recently, however, SBA has begun to issue more forgiveness PPP loan forgiveness denials.

Many of these recent denials issued by the SBA are not consistent with their own guidelines. Borrowers have received denial letters based on:

  •  Insufficient communication between SBA and lenders
  •  Misapplication of SBA’s Interim Final Rules (IFRs) or affiliation rules
  •  Mistakes by SBA surrounding the loss or misuse of borrower information

Borrowers should be aware that such denials are appealable. Consider challenging forgiveness denials if you believe SBA’s decision is in error.

Read our full guide to SBA’s PPP loan forgiveness denial below to learn more about how to appeal a denial, the criteria required for an appeal, and who can represent your company in the process. 

How Do I Know if My Business’ PPP Loan Forgiveness was Denied?

If SBA denied your application, you will receive an SBA Final Decision Letter in the mail. 

Learn more about what to do if your PPP loan is not forgiven, here.

How Do I Know Why My Business’ Forgiveness Application was Denied?

The first page of the Final Decision letter contains a section indented and in bold that provides the reasons SBA denied your request for forgiveness. It’s important to understand why SBA is rejecting the forgiveness application before taking action- such as appealing the denial.

Who Makes the Decision on PPP Forgiveness?

The decision to deny your PPP loan forgiveness can be made by:

  • Your lender (i.e. bank, credit union)
  • The Small Business Administration (SBA)

How Much Time Do I Have to Appeal a PPP Loan Forgiveness Denial?

You must respond to SBA and submit your appeal within 30 days of the date listed on your SBA Final Decision Letter.  The timeline for SBA forgiveness appeals is inflexible. Once your initial 30-day period expires, you will lose your right to appeal SBA’s denial to forgive your PPP loan.

How Do I Appeal a PPP Loan Forgiveness Denial?

You must appeal denials of forgiveness to the SBA’s Office of Hearings and Appeals (OHA) within the 30-day period. 

File appeals through OHA’s case portal. Filings for PPP appeals received in any other manner may be rejected and not docketed for processing.

SBA states that OHA has jurisdiction over appeals where SBA has provided the borrower with a PPP final loan review decision finding the borrower:

  • Is ineligible for a PPP loan
  • Is ineligible for the PPP loan amount received
  • Used the loan proceeds for unauthorized uses
  • Is ineligible for the PPP loan forgiveness amount determined by the lender in its full or partial approval decision issued to SBA, or
  • Is ineligible for PPP loan forgiveness when the lender has issued a full denial decision to SBA.

Learn more about how to appeal an SBA PPP forgiveness denial, here. 

What Information Do I Need to Provide in the Appeal?

The criteria for an appeal filed with the SBA are strict. According to SBA, appeals must contain:

  • A complete, detailed statement as to why the SBA loan review decision is erroneous, with accurate information and legal arguments supporting the statement;
  • No more than 20 pages (not including attachments)
  • Clearly labeled exhibits and attachments

Due to the strict criteria of the appeal, we recommend hiring a qualified attorney to represent your business and help you to create a strong, successful appeal. 

Who Can Represent My Business in the Appeal Process?

An identified legal representative of the business or a qualified attorney must represent the appeal since the SBA PPP loan is a business loan and not a personal loan. To represent your business, one must be:

  • A shareholder owner 
  • An officer, or
  • An attorney

Who Can’t Represent My Business in the SBA Appeal Process?

The following positions are not legally entitled or allowed to represent businesses in the SBA appeal process:

  • Certified Public Accountants (CPAs)
  • Lenders 
  • General Employees

What if I Lose My Appeal?

Any appeal denied in the Office of Hearings and Appeals will have to go to a higher court. Why? Because SBA is a federal agency. The process of going to federal court can be extremely tedious and expensive due to the strict regulations. 

To avoid the costly and time-consuming process of going to the federal district court, we recommend hiring a qualified attorney to make sure you’re building a strong appeal for your business.

While each case is unique and this is not an indication of success in other cases nor a promise of results, our team at Milikowsky Tax Law has extensive experience in government audits and cases involving government entities from IRS to SBA and CSLB.  

Contact Milikowsky Tax Law and learn how we can help.

you have 30 days to appeal an SBA PPP Loan denial

The U.S. Small Business Administration (SBA) is currently going through loan forgiveness applications to approve or deny claims. Businesses that filed for a PPP loan during the COVID-19 pandemic and used the funds correctly can apply for loan forgiveness.

According to SBA, the loan is eligible for forgiveness if, “during the 8- to 24-week covered period following loan disbursement:

  • Employee and compensation levels are maintained,
  • The loan proceeds are spent on payroll costs and other eligible expenses, and
  • At least 60% of the proceeds are spent on payroll costs.”

Many businesses, however, who used the funds correctly, may receive a letter of denial from SBA. Continue reading to learn more about what to do if SBA denies your forgiveness claim.

WHAT TO DO IF YOU RECEIVE A LETTER OF DENIAL

If you received a letter from the SBA denying your PPP loan forgiveness request within the last 30 days, the clock is ticking. You have 30 days to respond and file your appeal. The timeline for SBA forgiveness appeals isn’t flexible. Once your initial 30-day period expires, you will lose your right to appeal SBA’s denial to forgive your PPP loan.

Steps to Appeal

Watch our full video to learn more tips about how to appeal an SBA PPP loan denial.

 

The following steps are not a complete guide; rather, a summary of action items.

  1. Review “Final SBA Loan Review Decision Letter”
  2. Confirm your deadline to appeal the SBA decision
  3. Gather your documents and facts to identify issues to raise in your appeal
  4. Review SBA’s prior legal decisions and rulings
  5. Draft your appeal (max 20 pages) and include exhibits (your evidence) and SBA’s Final Loan Review Decision Letter
  6. *You must include your legal arguments, facts, and legal authority to support your position to show SBA’s denial was “clearly erroneous” (there are additional requirements – see SBA’s website)
  7. Create an online account at appeals.sba.gov
  8. Answer all questions truthfully and completely when responding to SBA’s online questionnaire
  9. Identify a legal representative for your business to handle the SBA appeal
  10. Upload your appeal, exhibits, and SBA Final Decision Letter

We strongly recommend obtaining an attorney to represent your company, prepare, and file your formal appeal. Note that a CPA is not authorized to represent your business during the appeals process.

The ONLY individuals who can represent your company in the appeals process are: 

  • An owner
  • A company officer
  • An attorney

For more information on what to do if your PPP loan is not forgiven, read our article here.

 

act quickly to appeal an SBA PPP Loan forgiveness denail

the sba denial is serious. partnering with an attorney helps your business find the best outcome

During the COVID-19 pandemic, the Small Business Administration (SBA) doled out Payment Protection Program (PPP) loans to qualified businesses. Over the course of the program, SBA granted over $809 billion in loans.

SBA is currently processing loan forgiveness and loan denials. Businesses that meet SBA PPP loan forgiveness terms are eligible for forgiveness of their PPP loans. 

SBA PPP Loan forgiveness is only eligible for businesses if they used the loan accordingly:

  • “Employee and compensation levels are maintained,
  • The loan proceeds are spent on payroll costs and other eligible expenses, and
  • At least 60% of the proceeds are spent on payroll costs.”

However, if a business fails to meet the forgiveness criteria, they are responsible for payment in full of the total loan amount. 

If your business applies for PPP loan forgiveness and it is denied, you have 30 days to appeal the denial. This deadline is unwavering, and appeals submitted after 30 days are not eligible, and your business will be responsible for paying back the loan amount in full.  

The agency is also selective on who can defend your business during an appeals process. The only people who can represent your business are:

  • An attorney 
  • The owner 
  • A company officer 

* A CPA cannot defend you nor can they appeal your forgiveness denial. 

What are the Different Types of Appeals?

The Office of Hearings and Appeals (OHA) has jurisdiction over SBA PPP loans. When they deny a loan forgiveness application, it’s due to the following: 

  1. The business is not eligible for the PPP loan
  2. The business is not eligible for the PPP loan amount received;
  3. The business used the loan proceeds for unauthorized expenses;
  4. The business is not eligible  for the PPP loan forgiveness amount determined by the lender in its full or partial approval decision issued to SBA; or
  5. The business is not eligible for PPP loan forgiveness when the lender has issued a full denial decision to SBA.

Loan Forgiveness Denial Appeal Process

If your business receives an SBA PPP Loan denial decision letter, act quickly.

The following steps are a guide for what to do if your business receives a letter of denial.

  1. Review “Final SBA Loan Review Decision Letter”
  2. Confirm your deadline to appeal the SBA decision
  3. Gather your documents and facts to identify issues to raise in your appeal
  4. We strongly recommend retaining a trusted attorney to represent your company because they will prepare, file, and defend your formal appeal.
  5. Review SBA’s prior legal decisions & rulings
  6. Draft your Appeal (max 20 pages) and include exhibits (your evidence) and SBA’s Final Loan Review Decision Letter
  • You must include your legal arguments, facts, and legal authority to support your position to show SBA’s denial was “clearly erroneous” (there are additional requirements – see SBA’s website)
  • The appeal must also include a copy of the SBA loan review decision being appealed, a statement as to why the denial is erroneous, and the contact information of the business and/or the business’s attorney.
  1. Create an online account at appeals.sba.gov
  2. Answer all questions truthfully and completely when responding to SBA’s online questionnaire.
  3. Identify a legal representative for your business to handle the SBA Appeal.
  4. Upload your appeal, exhibits, and SBA Final Decision Letter. 
  5. Wait for the final decision.

For more resources on how to appeal an SBA PPP forgiveness denial, read our article, here. Keep in mind that partnering with an attorney, like our team here at Milikowsky Tax Law, can help save your business from potential mistakes.

 

 If SBA sends a Final SBA Loan Review Decision Letter, you have 30 days to submit an appeal. Partner with an attorney to help defend your business.

small businesses who were denied the PPP loan forgiveness can still appeal for forgiveness.

Business owners who applied for SBA PPP loan forgiveness, but were denied have a limited time frame in which to appeal the forgiveness denial. Read on to learn about the process of appeal, what steps you must take, and the strict timeframe in which you must file to appeal a Paycheck Protection Program loan forgiveness denial from the Small Business Administration. *

*The information provided is general in nature and not intended to give legal advice or to create any type of attorney-client privilege

Watch the video below to hear John Milikowsy review how to appeal an SBA PPP forgiveness denial. 

 

 

 

If you received a notice of denial of your PPP loan forgiveness, the first step is to confirm who denied your application. The denial can come from:

  • Your lender (Bank, Credit Union or Fintech)
  • The Small Business Administration (SBA)

If your lender denied your application, you may not have appeal rights and you will have to consult with the lender themselves to find out the reasons why the forgiveness was denied and what options you have going forward. 

If the SBA denied your application, you will have received an SBA Final Decision Letter in the mail. The letter will have a date printed on it. If you wish to appeal your forgiveness denial, you must reply to SBA and submit your appeal within 30 days of the date listed on your final decision letter. Failure to reply and submit an appeal by or before the 30-day limit means you may forfeit your appeal rights, and you will have to repay the full amount of the PPP loan.

 

SBA Final Decision Denial Letter 

The first page of the Final Decision letter contains a section indented in bold that provides the reasons that SBA denied your forgiveness application. Before taking action, it’s important to understand why SBA is rejecting the forgiveness application.  

 

Find Evidence Through Resources 

Your obligation, and duty when filing an appeal is to show that SBA was clearly in error in denying your forgiveness application. In order to show that SBA made an error in denying your application, it’s crucial to research, provide legal arguments, and evidence to counter their claim. Evidence is critical to support your case.

SBA uses the Office of Hearing and Appeals (OHA) as a resource to hear cases from borrowers seeking appeals for unforgiven loans. Review their website to view their published prior opinions, one of them may relate to your case. 

The best recommendation is to hire a qualified attorney to make sure that you’re putting the most successful appeal together. Losing your appeal will necessitate filing with the federal district court, a costly and time-consuming process. There are myriad rules and regulations involved in federal cases.  Because SBA is a federal agency, any appeal denied in the Office of Hearings and Appeals will have to go to a higher court. 

The CARES act provided the general authority for SBA to issue PPP loans. This act also provides the limitations and the qualifications for which companies qualify for the loan, and for loan forgiveness. Your attorney will know the CARES Act and all of its intricacies.  IF you choose to represent yourself in your appeal, be sure to review the guidelines and details of loan forgiveness on their website. 

The Code of Federal Regulations (CFR) is another SBA published body of law. These regulations help clarify what companies were eligible or ineligible for the PPP loan and for loan forgiveness. For additional clarity, the CFR provides SBAs operating procedures.

By researching the laws and guidelines set forth by SBA, the CARES Act, the CFR guidelines, and gathering all of the documentation around your original application and denial, you can create a strong, coherent case for SBA to overturn their denial of forgiveness.  

 

Creating the Appeal

The criteria for an appeal filed with the SBA are strict.  The appeal must be 20 pages or less. In order to meet this limit, you must have your facts clearly stated so they can be easily understood. There is no room for excessive rambling or lengthy explanations. 

The appeal itself must provide legal authority and evidence to support your arguments, as well as include the SBA’s final decision letter. Without submitting the < 20-page appeal document and the original final decision letter, your case can be summarily dismissed, which waives your right to appeal. 

Since the SBA PPP loan is a business loan, not a personal loan, an identified legal representative of the business must represent the appeal (or a qualified attorney). Only one of three people can legally represent the business:

  • Shareholder owner 
  • An officer 
  • An attorney 

Who is not legally entitled or allowed to represent businesses in the SBA appeal process? 

  • Certified Public Accountants (CPAs)
  • Lenders 
  • General  Employees

Step one is to submit the appeal through the SBA online portal at appeals.sba.gov. The appeal form will ask you to create an account so you can log in and upload the appeal. Once your account is created, there will be other questions in the portal for you to answer to complete the process. Finally, upload the following documents into your account: 

  • SBA appeal
  • Decision letter
  • All evidence collected 

This information must be collected and submitted before the 30-day window closes. 

 

Post Appeal Submission

After your appeal is submitted, we recommend sending a copy of your appeal to your lender. They may defer your loan repayment for the loan amount until the SBA makes its final ruling. The time it takes for SBA to reach a decision varies. Best practice is to log into your portal account several times a week to check for messages or notices that indicate the status of your appeal.  At times, there may be requirements that you have to respond to. 

Throughout this process, it’s essential to respond in a timely manner. Missing deadlines is a mistake that can lead to a denied appeal– and thereby having to repay the loan amount in full. 

If your appeal was denied, you can request a reconsideration of the decision. If the reconsideration is denied, then the next step is to file a case in the federal district court. At this point, the cost and inconvenience of the process increase many times over. Because of this, be sure you take the proper time to file your initial appeal.  We recommend hiring an attorney who has experience with government agencies, is highly qualified, and understands your business.

 

Client Case study

One of our recent clients is a business owner whose PPP loan was denied forgiveness.  He came to us to see if we could help with his appeal to the SBA.  He and many other business owners in his industry applied for and were granted PPP loans at the start of the COVID-19 pandemic.  When it came time to apply for forgiveness, he had his bookkeeper submit all of the documentation to show that they had used the funds correctly to cover 75% payroll costs and 25% operating expenses.  Over the course of the next months, his fellow business owners received their forgiveness decisions and were all granted forgiveness by the PPP.  Except him.  Our client received a final decision letter of denial from the SBA. 

In this case, The bank recommended forgiveness but the SBA denied the forgiveness because his bookkeeper accidentally put the wrong NICS code. When he got the denial the business owner did not get on the phone himself with SBA but put his bookkeeper on the line with the agency to explain what his company does. The bookkeeper’s description of the business led them to believe he was in a prohibited industry… and they denied the forgiveness.

At the SBA the overwhelming number of cases has caused an influx of new hires, many of whom are learning the codes and structures of SBA loan forgiveness on the job.  This means there is less nuance in a rejection than a business owner might think.  Often, the SBA employees are simply matching NICS codes with industries, checking them against prohibited business lists, and issuing rejections. 

Our team researched the causes for the loan forgiveness denial, wrote the under 20 page appeal letter, gathered all supporting evidence, and argued on his behalf successfully to the SBA OHA.  

While each case is unique and this is not an indication of success in other cases nor a promise of results, our team has extensive experience in government audits and cases involving government entities from IRS to SBA and CSLB.  

For more information on SBA PPP loans, read our article here. 

 

PPP loans that are not forgiven have a 30 day window where you can appeal for forgiveness

 

PPP Loan Applications are Closed as Fraudulent Cases Emerge

 

Over the past year businesses flocked to the Small Business Administration (SBA) to submit applications to receive their share of the federally allocated Paycheck Protection Program funding. 

 

PPP loans were distributed to businesses struck hard by the ongoing coronavirus pandemic. Their intended use was to help keep workers employed by providing funding to support their ongoing paychecks following mass layoffs at the forefront of the pandemic. 

 

Since their initial rollout, it has been discovered that many businesses wrongly claimed PPP loans, resulting in millions of dollars of fraudulent claims. 

 

As of May 31, SBA has since closed the application for PPP loans. Despite being renewed by the federal government numerous times in both 2020 and 2021, businesses are no longer able to submit new requests for funding. 

 

As of May 23, SBA had approved over 11.6 million loans, totaling approximately $796 billion.

 

Even since the program application portal has been shut down, SBA will take approximately one month to process all existing applications submitted prior to the closure. 

 

While the initial rollout of the PPP loan distribution process brought with it thousands of fraudulent claims, it’s now expected that the program overall served as a starting point for SBA to continue serving small businesses into the future. 

 

While the general PPP loan applications have been closed at this time, SBA has been granted an additional $100 million to fund a pilot program providing support to underserved small businesses. This comes after speculation that despite the hundreds of billions of dollars in loans distributed over the past year, some of the neediest businesses were not able to receive the support they desperately needed. 

 

Additionally, Congress has recently granted SBA the responsibility to take charge of new relief programs for businesses in the restaurant and live-events industries, two industries that are returning to their former glory. 

 

The discovery of such a large number of fraudulent PPP claims has left all recipients at risk of an audit. While all loans disbursed of $2 million or more are guaranteed to be audited by SBA, all recipients, regardless of loan size are at risk of a potential audit. 

 

While SBA is auditing a large number of loans that were dispersed as part of the Paycheck Protection Program, those that are found to have been spent as they were intended have the opportunity to be forgiven entirely. 

 

If your business received a PPP loan and is confident that you utilized your funding for its intended purposes, there may not be a significant reason to be concerned in the event of an audit. However, in the event that you are the subject of an SBA audit, it’s imperative that you maintain ample records and documentation of all expenditures related to your receipt of a PPP loan. 

 

Another aspect of SBA audits to be concerned about is SBA’s relationship with other government agencies including EDD and IRS. In the event that your business is audited as a recipient of a PPP loan, there is the potential that SBA may uncover information in their audit that may lead them to involve additional government agencies to conduct further audits of your business. 

 

EDD and IRS audits hold significantly more complex potential outcomes and should not be considered lightly. While your business may not have otherwise triggered an IRS or EDD audit, SBA has the simple ability to pinpoint businesses for them to investigate further. 

 

If your business is the subject of an SBA, EDD, or IRS audit, the best practice is to reach out to an experienced tax attorney immediately. Making the wrong choices in the event of an audit has the potential to further incriminate you without your intention of doing so. An experienced tax attorney such as those on our team at Milikowsky Tax Law can support you through the complicated process of an audit and do our best to support the best possible outcome for you and your business. 

 

To get started working with our team, call or contact us today. At Milikowsky Tax Law, we keep businesses in business.

 

ppp fraud

2020 was a challenging year for many business owners. The ongoing global pandemic not only brought on a health crisis, but an economic crisis to match. While many companies were able to stay open because they were deemed to be essential workers, many others struggled to maintain their day-to-day operating costs on their own and turned to the government’s SBA PPP and EIDL programs for support. 

 

SBA informed lenders Tuesday, May 4th that the PPP general fund was out of money. The remaining funds ($8 billion) are set aside for community financial institutions (CFIs).  CFIs work with businesses in underserved communities. An additional $6 billion is being held in reserve for PPP applications that are still under review.

 

Between stimulus checks, PPP loans, and EIDL funds, the government was able to help many businesses and individuals hold on through these challenging times. 

 

While government support was critical to many businesses, it has recently come to light that not all recipients of the distributed PPP loans were eligible to receive such financial support. The Small Business Administration (SBA) announced that they would begin auditing loan recipients following the revelation that many recipients of PPP funds applied under false pretenses.  

 

It was initially declared that any business that received a loan of $2 million or more would be audited by SBA to confirm the correct receipt and usage of their loan. Now as we surpass a full year since the initial release of PPP funds, IRS Criminal Investigation Division says they have reviewed more than “350 cases and $440 million in tax and money laundering cases have been investigated in the last year.” As a result, they intend to continue similar audits going forward based on their findings thus far. 

 

Some instances included people attempting to take advantage of the benefits set forth by the Coronavirus Aid, Relief, and Economic Security (CARES) Act include establishing fake businesses to claim eligibility or even claiming loans for businesses that were closed years prior. 

 

For those businesses that received PPP funds but did not keep close track of the funds, those who commingled funds with operating funds and did not adequately document the ways n which those funds were used, the specter of audit may loom large.  Loans under $150K have largely been written off as forgiven.  Applicants who ask for forgiveness must keep records of the expenses paid with the PPP funds for 3 years (we suggest 5).  

 

In the event of an SBA audit, there is a very limited window in which the audited party can respond, provide paperwork and verify the correct usage of PPP funds. If you are audited by SBA, call the law offices of John Milikowsky immediately.  We have resolved over 300 cases of IRS, EDD, and other government audits and we can guide you through the rocky waters of your audit.

Insights for CPAs to Minimize Audit Risk for Their Clients

If you are a CPA, here are 4 things to help your client reduce the risk of an EDD, IRS, or SBA audit:

1. Confirm that your client’s 1099-K (provided by a merchant processor) does not report gross proceeds from credit card sales that are higher than the amount you are reporting as “gross receipts” on a business income tax return. 

If there is a difference, you may consider adding a statement to explain a legitimate difference. For instance, chargebacks and returns are not subtracted from the amount of “gross proceeds” on the 1099-K form.

2. If you have a client who has more 1099 contractors than employees, have your client provide facts to support these workers have a legitimate and independent business i.e. EIN, business entity, website – something to establish a legit business. 

EDD and IRS typically look under one the following expense categories for contractors to identify contractors that paid by a business: 

  • Schedule C: “commissions and fees”; “contract labor”; or “Legal and professional”; 
  • 1120S (S corp) and 1065 (LLC): typically find these are reported under COGS or under “other deductions” with a label such as “outside services” or “contractors.”

If you prepare a business return where the business has, for instance, 10 independent contractors and only 2 employees (i.e. where the business owners are also officers of the corporation), you should spend time with the company’s management team to analyze whether the 1099 contractors are legitimate under your state’s law and federal law. 

California recently passed a new law called AB5 (effective as of 1/1/2020) that changes the analysis of a worker’s status. AB5 now has a 3-part test that is more difficult for companies to satisfy. 

You will want to review your client’s general ledger and confirm they are properly reporting ALL 1099s. You should confirm that every independent contractor who provides services (over $600) receives a 1099. If one is missed, the Employment Development Department (EDD) may extend a 3-year audit to 8 years and assess an additional penalty, where the penalty may be higher than the tax.

When reviewing the general ledger, confirm the payees are truly contractors and not workers that should be reported as employees.

Insights for CPAs to Minimize Audit Risk for Their Clients

3. If your client is selling a business, the buyer will require the current owner to produce a “tax clearance certificate” from the California Department of Tax and Fee Administration (CDTFA), the agency responsible for collecting and regulating sales tax in California.

We have had numerous audits that commenced during escrow, possibly a result of the Tax Clearance Certificate application that was filed with the tax agency. So, you may want to review your client’s general ledger and confirm that the amount of sales tax reported and paid to the state is accurate and the proper correct sales tax rate was used (that includes both local and city tax), as well as confirming that exempt sales are truly exempt.

4. If your client applied for a PPP loan, and receives a request for information and documents from their bank to substantiate their financials, consider calling a tax attorney to review SBA’s regulations and any questions from the bank. 

The Small Business Administration (SBA) is currently investigating all SBA Payment Protection Program (PPP) loans, regardless of the dollar amount of the loan.

Based on information obtained from SBA, once a request has been made for additional documents following the funding of the loan, there is an active investigation. The response from you, the CPA, and your client will affect whether the case is referred to for potential criminal investigation. This would be the case when the information simply does not support the financials or the requirements of the PPP loan.

Issues that have come up in some of our cases include: 

  • Not having a legitimate work visa
  • Using PPP funds obtained by one company that another company applied for and obtained through SBA

There are significant benefits to a CPA working with our firm. Some include the following: 

  • Our law firm does NOT prepare tax returns. We work with CPAs referring clients to those who need a business/personal tax return.
  • We typically have joint representation during an EDD or IRS audit.
  • We also handle criminal tax investigations to protect you and your client because your communications with an IRS Criminal Investigator are NOT protected by any privilege. However, having an attorney represent your client will ensure the communication and evidence your client provides are protected.

For more information or to get started working with us, contact us today. 

CPA Tips

If you are a CPA, here are 5 things to help your client reduce the risk of an EDD, IRS, or SBA audit:

1: Confirm that your client’s 1099-K (provided by a merchant processor) does not report gross proceeds from credit card sales that are higher than the amount you are reporting as “gross receipts” on a business income tax return. 

If there is a difference, you may consider adding a statement to explain a legitimate difference. For instance, chargebacks and returns are not subtracted from the amount of “gross proceeds” on the 1099-K form.

2: If you have a client who has more 1099 contractors than employees, have your client provide facts to support these workers have a legitimate and independent business i.e. EIN, business entity, website – something to establish a legit business. 

EDD and IRS typically look under one the following expense categories for contractors to identify contractors that paid by a business: 

  • Schedule C: “commissions and fees”; “contract labor”; or “Legal and professional”; 
  • 1120S (S corp) and 1065 (LLC): typically find these are reported under COGS or under “other deductions” with a label such as “outside services” or “contractors.”

If you prepare a business return where the business has, for instance, 10 independent contractors and only 2 employees (i.e. where the business owners are also officers of the corporation), you should spend time with the company’s management team to analyze whether the 1099 contractors are legitimate under your state’s law and federal law. 

California recently passed a new law called AB5 (effective as of 1/1/2020) that changes the analysis of a worker’s status. AB5 now has a 3-part test that is more difficult for companies to satisfy. 

You will want to review your client’s general ledger and confirm they are properly reporting ALL 1099s. You should confirm that every independent contractor who provides services (over $600) receives a 1099. If one is missed, the Employment Development Department (EDD) may extend a 3-year audit to 8 years and assess an additional penalty, where the penalty may be higher than the tax.

When reviewing the general ledger, confirm the payees are truly contractors and not workers that should be reported as employees.

3: If your client is selling a business, the buyer will require the current owner to produce a “tax clearance certificate” from the California Department of Tax and Fee Administration (CDTFA), the agency responsible for collecting and regulating sales tax in California.

We have had numerous audits that commenced during escrow, possibly a result of the Tax Clearance Certificate application that was filed with the tax agency. So, you may want to review your client’s general ledger and confirm that the amount of sales tax reported and paid to the state is accurate and the proper correct sales tax rate was used (that includes both local and city tax), as well as confirming that exempt sales are truly exempt.

4: If your client applied for a PPP loan, and receives a request for information and documents from their bank to substantiate their financials, consider calling a tax attorney to review SBA’s regulations and any questions from the bank. 

The Small Business Administration (SBA) is currently investigating all SBA Payment Protection Program (PPP) loans, regardless of the dollar amount of the loan.

Based on information obtained from SBA, once a request has been made for additional documents following the funding of the loan, there is an active investigation. The response from you, the CPA, and your client will affect whether the case is referred to for potential criminal investigation. This would be the case when the information simply does not support the financials or the requirements of the PPP loan.

Issues that have come up in some of our cases include: 

  • Not having a legitimate work visa
  • Using PPP funds obtained by one company that another company applied for and obtained through SBA

5: There are significant benefits to a CPA working with our firm. Some include the following: 

  • Our law firm does NOT prepare tax returns. We work with CPAs referring clients who need a business/personal tax return.
  • We typically have joint representation during an EDD or IRS audit.
  • We also handle criminal tax investigations to protect you and your client. AS you well know,  your communications with an IRS Criminal Investigator are NOT protected by any privilege. However, having an attorney represent your client will ensure the communication and evidence your client provides is protected.

For more information or to get started working with us, contact us today. 

Earlier this year the Coronavirus Aid, Relief, and Economic Security (CARES) Act offered businesses the opportunity to apply for loans under the Paycheck Protection Program (PPP). Businesses were eligible to receive up to as much as 2.5 times their average monthly payroll costs, up to a maximum of $10 million.

Following the distribution of $349 billion in PPP loans, it was discovered that many businesses improperly applied for the loans. As a result, the Small Business Administration (SBA) has begun the process of auditing all loans over $1 million. For those small businesses whose loans were under $150,000, a bill is still in the process to automatically forgive those loans.

In addition to the possibility of an impending audit, and, in fact, compounding the tax complexity, businesses are now faced with the question of how to properly claim their PPP loans as they complete their year-end taxes. The challenges presented by this new situation demand a close partnership between CPAs and tax attorneys.

As your business consults with your CPA or accounting team, it is extremely beneficial to also consult a legal tax specialist to ensure that your loan is properly declared and your deductions do not flag your business for IRS or SBA audit.

The primary question surrounding the declaration of your PPP funds as part of your annual return is whether or not business expenses are eligible for deduction if they were paid for by PPP funds. IRS originally stated that any expenses paid for with PPP funds were not eligible for a tax deduction.  However, recently that restriction was lifted, allowing for standard deductibility to apply regardless of whether PPP funds were used to pay those expenses.

Part of the logic behind this shift stemmed from the multiple revisions to the restrictions on the PPP loans.  Initially, businesses had to spend 75% of their loan funds on payroll and 25% on operating expenses, the terms were revised to allow for 60% to be spent on payroll and 40% on operations, and then terms were revised yet again.

Congress has declared that the purpose of the funds was to support businesses in need due to the economic effects of the current pandemic. The financial program was put in place to provide businesses with the funds necessary to continue paying wages and making payments on other key operating expenses.

Congress’s resulting response has been the vital piece leading to loan forgiveness and the decision that, even if a loan is forgiven, it will not count as income. Most recently, they have also made the decision to complete this protection by allowing businesses to claim normal tax deductions for business expenses paid for by PPP funds.

While Congress has officially made this decision a reality, IRS still stands by the opinion that allowing deductions for business expenses paid for by PPP funds “would be an impermissible double tax benefit to have income on debt forgiveness not to taxed as income, and then to also allow tax deductions for the expenses paid with the forgiven loan money.” While Congress has made what appears to be a final decision on the topic, there still remains the question of how IRS audits will be affected by these disparate interpretations.

Your CPA and tax attorney are your allies in the face of complex tax filings and government entity audits.  When you have questions, clarify before filing.  If you recognize a discrepancy after filing, address it with the help of a tax attorney, immediately.

CPA vs Tax Attorney: What’s the difference?

In some cases, it may be difficult to distinguish what your CPA is capable of helping you with and which tasks are better suited for a tax attorney. Both are experts when it comes to tax matters but in different ways. 

While your CPA is an expert at preparing and submitting your taxes correctly, you’ll need a tax attorney in the event that Internal Revenue Services (IRS) notices inconsistencies in your tax submissions or if you’re the subject of an audit. In any case, you’re best off having access to both experts. 

What does a CPA do? 

A Certified Public Accountant (CPA) has a significant educational background under their belt. They are required to have completed 150 hours or more of undergraduate educational studies before passing an extensive CPA examination. 

Additionally, they have to commit to 120 hours of continued education every 3 years. As such, they considered some of the highest level experts when it comes to handling tax preparation. A simple way to think of CPAs is that all CPAs are accountants, but not all accountants are CPAs. The process of becoming a CPA is more complex than an average accountant. 

A CPA’s services are not often used by any average taxpayer but instead are usually used in more complex cases. CPAs know how to abide by federal laws while still minimizing your tax liability and maximizing benefits. Developing a strong ongoing relationship with a CPA may suit your needs if you are looking to build a long-term tax plan and need support sticking to it. 

CPAs are often capable of providing various services to their clients in addition to tax preparation. Some additional services they may provide include the following: 

  • Financial record review
  • Maximizing deductions 
  • Business structuring 
  • Health insurance selection
  • General accounting

Many people choose to have a go-to CPA available for support on a regular basis. If this is not the case for you, you may choose to consult them when:

  • Filing your taxes
  • Completing an application for a loan
  • Completing an internal audit
  • When reviewing tax payments and balances

Their skills and expertise are best suited to assist you when handling these situations. 

What does a tax attorney do?

While a tax attorney is still an excellent resource to taxpayers, they serve a different set of needs than CPAs. While CPAs are technically qualified to represent you before a court in the event of an audit, a tax attorney is likely a better choice in situations where you may be involved with trouble with tax authorities. 

Similar to CPAs, tax attorneys have to complete an intensive educational path before qualifying to satisfy their role. After completing a bachelor’s degree, they must complete a Juris Doctor degree and study to take the bar exam for the state in which they intend to practice. Once they have passed the bar exam, their license must be kept up with continued ongoing education. On top of that, many tax attorneys choose to pursue a Master of Laws in Taxation to further their specialization in their field. 

Tax attorneys specialize in the legalities of tax payment and their services are most often called upon in defense cases when taxpayers are faced with audits from IRS, EDD, or other federal tax authorities. While tax attorneys may have slightly varying specialties, one thing most tax attorneys have in common is expertise in tax controversy and dispute resolution. 

One of the benefits of working with a tax attorney is that only tax attorneys have an attorney-client privilege that protects communication between a client and an attorney. This privilege can restrict IRS and California State tax agencies from discovering information provided to attorneys in confidence.

Tax attorneys fulfill various services for their clients as previously mentioned. The following include the various reasons you may need to consult a tax attorney: 

  • IRS tax audits 
  • Criminal tax defense 
  • Reporting ownership of foreign bank accounts and corporations 
  • International business transactions 
  • Tax disputes and IRS tax collection 

Who can represent your business during an SBA PPP Loan Forgiveness Appeal?

SBA has started giving loan forgiveness for businesses that used the PPP loans during the early stages of the pandemic. However, businesses deemed to have not used the funds as they were intended received loan forgiveness denials. 

If SBA denied your business’s loan forgiveness application, they will send an SBA Final Decision Letter in the mail. If you wish to appeal your forgiveness denial, you must reply and submit an under 20-page appeal 30 days before the date printed on the decision letter. Submission after the 30-day mark forfeits your appeal rights and will require you to repay the full PPP loan amount. 

Only three people can legally represent your business during an SBA PPP Loan Forgiveness Appeal:

  • An attorney
  • Shareholder owner
  • An officer

Those who are not legally entitled or allowed to represent businesses during an SBA appeal include: 

  • Certified Public Accountants (CPAs)
  • Lenders 
  • General Employees

An attorney is legally entitled and allowed to represent your business during the appeals process. They will be able to research why your application was denied, collect supporting evidence, and create the 20-page appeal for SBA.  

Final Thoughts

While CPAs and tax attorneys both work within a similar framework, their unique specialization equips them for varying roles. In some cases your business may only need to use the services of one or the other, however, in most cases, the two roles complement one another. While your CPA may be an excellent ongoing partner to assist with the day-to-day management and filing of your taxes, they may not be the best-suited partner in the event of trouble with tax authorities. 

Rather than challenging your CPA to attempt to manage tasks outside of their usual specialties, reach out to an experts attorney to assist with any legal tax concerns you may have. Curious about what you should be paying for a tax attorney? Read our article here explaining different instances when hiring an attorney may be worth your while. 

 

CPA vs Tax Attorney: What’s the difference?