Miller Canfield: PPP Loan Audits, What to Expect and How to PrepareSeptember 24, 2020
Borrowers that received PPP loans from the Small Business Administration (SBA) are subject to audit and investigation by the federal government’s Special Inspector General for Pandemic Recovery in the U.S. Treasury Department, which also has the authority to refer matters to the Department of Justice for a civil or criminal proceeding. The SBA and the Treasury Department also announced that all PPP loans of $2 million or more will be subject to an audit. In addition, there is a possibility that a private litigant may sue a borrower in the name of the Federal government by bringing a qui tam proceeding under the False Claims Act and receiving a portion of any recovery.
Because the stakes can be high, it is important for PPP loan borrowers to prepare for and defend themselves during such audits, investigations, and litigation. Experts from Miller Canfield, Brad Arbuckle, principal of Corporate and Transactions; Jeff LaBine, principal and co-leader of the Corporate and Transactions Group; Ryan Riehl, principal of Tax; and Gerald Gleeson II, principal of Litigation and Dispute Resolution, shared how to do just that.
Stating the Facts
The SBA will audit eligibility, certification by the borrower that it needed the loan, the loan amount and use of proceeds, and loan forgiveness calculation. Businesses can end up in a position where the smallest penalty issue may be having to repay your loan right away. Every borrower that took out a PPP application was required to certify that current economic uncertainty made the loan request necessary to support ongoing operations.
“You don’t want the auditor, whoever it may be, to think that you didn’t have this information available, ready, thought out, and show you took a good process in taking the loan,” said LaBine.
The major takeaway lenders need to remember is that it is not one factor, it’s multiple factors that need to be considered. Having more documentation during the loan period is better in the long run. When someone comes to audit and potentially question company projections, you can have proof that your projections match current results.
The Appeal Process
If you get an adverse determination on a PPP audit, you have the right to appeal within 30 days. Starting with correct audit information usually leads to better results of both the appeals and knowing your rights in the court system.
“I think the emphasis is on doing the due diligence getting the documentation in place at the audit so we have a better chance to have success as we work our way through the administrative law system and potentially the Federal court system,” said Riehl.
Within 30 days, your company must submit a full brief on why the decisions deserve a second look and what specific facts and laws with which your company disagrees. Getting a lawyer involved earlier is beneficial because there could be both economic and potential criminal risk.
Recommendations for Preparing an Audit
One of the key points of the PPP loan audit is to establish that the borrower had a need for the funding. In addition, there must be financial nexus to the dollars that were received under the PPP loan.
“There are some parallels between an IRS-type audit, but there are some important distinctions as well,” said Riehl. “I think that the general principle of both is that we want to have adequate records to substantiate the actions taken.”
Understanding the next year of loan eligibility and planning your business’ expenditures is critical. Businesses must also maintain state and federal tax records or financial statements. Miller Canfield advises borrowers to use accountants to prepare their forms and look through the initial PPP loan application to best prepare for an audit.