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PPP Loan Audits: What to Expect, and How to Appeal

money under a flag

In April 2020 the Paycheck Protection Program (PPP) was announced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It granted loans to businesses across the country to support more than 51 million jobs and over 80 percent of all small business employees. While the average loan size was $100,000, some businesses received up to $10 million. Since its initial announcement, however, the U.S. Small Business Administration (SBA) has begun performing audits on the loans they granted following the discovery that many loans were granted under false pretenses. 

Currently, all loan recipients are at risk of being audited though some are already eligible for forgiveness. Paycheck Protection Program borrowers may be eligible for loan forgiveness if they can prove that the funds they were issued were used for approved uses such as payroll costs, mortgage payments, rent, or utilities within the 8-24 week period following the distribution of funds. Those eligible for loan forgiveness need only to submit the appropriate form, provide documentation, and partner with their PPP lender for continued communication. 

Efforts on the part of the SBA and Federal Government, as well as trade groups, have been made to forgive all loans under $150,000.  The EZ form for forgiveness turns out to not be quite as easy as originally intended. For those businesses that are not eligible for loan forgiveness and are at risk of an audit, here is everything you need to know.  

Who is being audited?

Due to the very public nature of the loans being issued, SBA made the decision to begin performing a full audit of all loans $2 million or more before providing any loan forgiveness. As such, in partnership with the Treasury Department, SBA has begun their audits on these loan recipients upon the submission of their loan forgiveness request forms. Additionally, however, SBA has reserved the right to audit loans of any amount at their will as a “spot check” to ensure integrity at all loan amounts. 

How to Prepare for a PPP audit

The SBA PPP audit process is new and there is little known information regarding the details of these audits, preparing for them is challenging. What is known is that you will be expected to provide any and all documentation regarding your application for and receipt of the loan granted to your business and the use of the funds. 

Additionally, you should be certain to retain clear documentation of how all of the funds were spent. Below is a list of suggested documents that you may want to consider having prepared in the event of an audit:

  • Copy of PPP loan application with headcount and compensation of employees
  • Any internal documents and strategic plans detailing the necessity of the loan and plan for the use of PPP funds
  • Financial records, including bank statements, payroll records, and cash disbursements journal
  • Mortgage statements, lease agreements, and utility statements
  • Any available records detailing the company’s access to capital (if applicable)
  • Records showing the company’s current business activities and liquidity
  • Legal support to verify that the company acted in good faith for the necessity certification

How can I appeal an audit?

According to an interim final rule issued by SBA, appeals must be filed within 30 days of the receipt of the final SBA loan audit decision or the notification of the final decision, whichever is earlier. Appeals will be heard by the SBA Office of Hearings and Appeals (OHA).

It should be noted that an appeal of any SBA loan review decision does not extend the deferral period of the PPP loan. If SBA determines that your business must repay their PPP loan or a portion thereof, filing an appeal will not prolong the deferral period for those payments. 

When filing an appeal petition, you must ensure to include the following: 

  1. The basis for OHA’s jurisdiction, including, but not limited to, evidence the appeal is timely filed in accordance with
  2. A copy of the SBA loan review decision being appealed, or a description of the decision if a copy is unavailable
  3. A full and specific statement as to why the SBA loan review decision is alleged to be erroneous, together with all factual information and legal arguments supporting the allegations;
  4. The relief being sought;
  5. Signed copies of payroll tax filings actually reported to the Internal Revenue Service (IRS), and state quarterly business and individual employee wage reporting and unemployment insurance tax filings actually reported to the relevant state, for the relevant periods of time, if not provided with the PPP Loan Forgiveness Application (SBA Form 3508, SBA Form 3508EZ, or lender’s equivalent), or an explanation as to why they are not relevant or not available;
  6. Signed copies of applicable federal tax returns actually filed with the IRS with appropriate schedules (e.g., IRS Form 1040 with Schedule C/F) documenting income for self-employed individuals or partners in a partnership, if not provided with the PPP Borrower Application Form (SBA Form 2483 or lender’s equivalent), or an explanation as to why they are not relevant or not available; and
  7. The name, address, telephone number, email address, and signature of the appellant or its attorney

Appeal petitions should not exceed 20 pages in length, excluding any attachments. Upon the completion of the preparation of your appeal, it should be submitted to:

Associate General Counsel for Litigation

U.S. Small Business Administration

409 Third Street SW

Washington, DC 20416

Following the filing of an appeal, an Administrative Law Judge or Administrative Judge will be assigned to review the submission. The judge assigned will review SBA’s administrative record, the appellate petition, and the SBA’s answer as they make their decision. The judge will make their decision within 45 calendar days from its submission. The decision made by the judge is considered an initial decision but unless a request for review or reconsideration is filed, it will become the final decision 30 days after it is declared. 

Who can help me in the event of an audit?

In preparation for an audit, you may want to partner with certain professionals to support you throughout the process. First, consulting your accountant or CPA may be beneficial as you gather all relevant financial records. In most cases, your accountant is likely the one in charge of maintaining and organizing all financial records that SBA will request to review. 

Consulting a qualified tax attorney is also strongly recommended in the event of an audit. Their role is critical as you attempt to defend your case against SBA. While your CPA will be helpful in terms of providing necessary internal information, an experienced law attorney such as those at Milikowsky Tax Law is best equipped for building a strong defense in your favor. 

John Milikowsky’s experience defending cases against EDD and IRS makes him an invaluable asset in the face of a PPP loan. The Law Offices of Milikowsky Tax Law are well versed in legal defense and can help predict the outcome of an audit and organize the strongest defense based on your business’s unique situation.

ppp loan audits