Are You Ready for a PPP Loan Audit?

The US Treasury and Small Business Administration (SBA) have promised that all Paycheck Protection Program (PPP) Loans over $2 million that seek forgiveness will have the pleasure of an audit. While the size of the loan makes audits on loans over $2 million mandatory, there will be many others under the $2 million that will also have the audit experience. Are you ready?

If you fail your PPP audit, part or all of your loan forgiveness may be in jeopardy in addition to prosecution by the Department of Justice under the False Claims Act. The audit and prosecution may not be the only worries. You may also be subject to investigations and reviews by the Pandemic Response Accountability Committee, Congressional Oversight Committee and the Special Inspector General for Pandemic Recovery. States may also jump on the bandwagon with their own enforcement initiatives.

What is a borrower to do? Below are some steps you will want to consider regardless of your PPP loan size.

First, if your loan is over $2 million or you are a publicly traded company, you will be audited so start your engines and prepare now.

Second, regardless of your PPP loan size, prepare now. It will make the forgiveness process easier and you will be ready should the auditor choose you.

Begin preparing your documents now. The support you prepare now and before an audit are considered to be much more persuasive than documents you prepare after the audit begins. Setting aside a little time to keep your records now will save a lot of time creating them after the fact. Organize yourself and your records. Keep receipts, reports and invoice documents organized.

Third, document your analysis of your necessity to borrow loan funds to support your ongoing operations. Document your evidence as well. When you borrowed the PPP funds, you certified certain things including prior loans, the absence non-qualifying business activities, relationship with Congress and the SBA, current legal actions and obligations, and the big promises you made:

• All SBA loan proceeds will be used only for business-related purposes as specified in the loan application and consistent with the Paycheck Protection Program Rule. (Retain workers and maintain payroll or make mortgage interest payment, lease payments, and utility payments.)
• To the extent possible, I will purchase only American-made Equipment and products.
• Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.

To the extent you have document and analyses to support your certifications, now is the time to gather them together. If your documents or analysis are currently missing, now is the time to create them.

Judgement is required to certify that the loan request was necessary. Document your assumptions and project your revenue and expenses in times of normalcy and in this time of uncertainty. The analysis results and your supporting documents should support your certifications. If you have cash surpluses or savings for your business, be prepared to discuss why the cash alone would be insufficient to maintain operations and why the loan is needed.

(Update - As of this morning 5/13/2020, the SBA has issued an additional response to their frequently asked questions (see question 46) where they have provided safe harbor for all PPP loans under $2 million in regards to determining that current economic uncertainty makes the loan request necessary to support ongoing operations. This is good new as it relieves a burden to prove certification for one of the elements for a large group of the PPP loans.)
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As part of this gathering process, take the time to assess the risk that your certifications may be found untrue or inaccurate. The court of public opinion has already ruled against larger companies who qualified for the loan under the program and were forced to return the funds for public relations reasons. The real courts will ultimately decide if the funds were necessary so do what you can to mitigate that risk in your documentation gathering process.

Take the time to create a file of documents to support each certification you made on your application, including the ones you provided to the lender with your application (payroll run reports, payroll tax filings, etc.).

Fourth, start thinking about loan forgiveness. We are still waiting for final guidance on loan forgiveness calculations (the hot flaming ball of tar mentioned in last week’s blog is still on fire) but you can start keeping meticulous records of how you use the funds. Keep payroll run reports. Gather your lease agreements and mortgage records. Keep copies of invoices and checks or bank EFT records. There should be supporting documents for each expense you plan and hope to have forgiven.

You will also want to have supporting documentation to verify that your employee headcount and pay remained within the requirements for loan forgiveness.

Fifth, if you have a loan over the $2 million threshold for a mandatory audit or are a public company, consider holding a trial run of an audit or a “mock audit” now to find the holes that you will need to fill before you have the real thing.
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As I tell my clients when they ask about an IRS audit, if you are prepared, have your documentation and support  and haven’t done anything wrong then there is no need to fear being audited. That advice applies to the PPP loan audit too. Take the time now, before the audit, to prepare – keep accurate and adequate records, assess the risks and mitigate them, and keep moving forward.