Are forgiven PPP loans being investigated by the IRS?
According to the Pandemic Response Accountability Committee, 11,500 Small Business Administration (SBA) loans were issued under the Paycheck Protection Program. Of that number, 10,500 SBA loans were either partially or fully forgiven as of October 2, 2022, with an average amount of $72,100. The criteria for a forgivable loan, as established under the PPP program's forgiveness process, include the following three conditions -- all of which must be satisfied in order for a lender to forgive some or all of the loan amount:
- The loan recipient must have met PPP loan application and program requirements to receive the loan in the first place.
- Loan proceeds from PPP funds must have been used for allowable expenses, including payroll costs, rent, utilities, or interest on the business's mortgage loan. In addition, at least 60 percent of the loan proceeds must have been used for payroll-related costs.
- The recipient must either be a self-employed individual, sole proprietor, or independent contractor, or must be a business with one or more paid employees or independent contractors.
While forgiven debt is generally considered taxable income under IRS rules, PPP loan amounts that were properly forgiven are not required to be counted or reported as income for recipients. This is not true for an improperly forgiven PPP loan. However, small business owners who received loan forgiveness ought to be aware that their tax returns may be subject to greater SBA and IRS audit scrutiny, as the IRS seeks to ensure forgiven loan amounts were properly excluded from taxpayers' self-reported income. In addition, the IRS Criminal Investigation (CI) division has announced its commitment to investigating COVID-19 fraud, including fraud related to PPP loans.
The IRS also continues to encourage taxpayers to report tax-related illegal activities for PPP loans. Taxpayers who are aware that another individual or business improperly received loan forgiveness can complete IRS Form 3949-A, Information Referral.
What might happen if the IRS finds out my PPP loan forgiveness information was incorrect?
Ultimately, Paycheck Protection Program loan forgiveness is not automatic -- nor is it guaranteed. Loan recipients are required to apply for forgiveness and provide documentation to lenders to enable lenders to reasonably determine that loan proceeds were used for allowable purposes. The loan forgiveness application process includes an eligibility attestation as well as verification of financial and legal requirements. Lenders are supposed to review all of this information carefully when determining whether loan forgiveness is appropriate. However, if a loan is forgiven, the responsibility for ensuring that loan forgiveness was proper and that all relevant documentation is retained rests with the recipient small business taxpayer.
As previously mentioned, the IRS CI division is actively investigating PPP loan fraud as well as other types of COVID-19 tax-related fraud. In the event the IRS learns that PPP loan forgiveness was based on fraudulent, incomplete, misleading, or omitted information, or that a lender improperly forgave a loan, the taxpayer recipient may find themselves facing potentially serious consequences.
In addition to being liable for the amount of any ordinary income taxes due on the previously unreported amount of forgiven loan proceeds, taxpayers also risk fines, penalties, and interest on the amount of unpaid taxes. Loan recipients may also face civil and criminal liability in separate legal actions by the Department of Justice (DOJ) and state governments.
What can I do to correct my PPP loan forgiveness information with the IRS?
If you (or a small business under your control) received loan forgiveness for one or more PPP loans in a previous tax year but one or more of those loans were forgiven erroneously, contact a Rocket Lawyer network attorney or tax professional for guidance specific to your situation. You may file an amended tax return for each applicable tax year in order to include the forgiven PPP loan amounts in your income.
You may want to act quickly. Taking action promptly after becoming aware of the error may limit the amount of additional interest and penalties owed on the previously unreported income. If PPP loan forgiveness was improper, you can also expect to have to repay the additional unforgiven loan amount plus interest.
What are the possible consequences for missing information or inaccurate information on my application for loan forgiveness?
When you apply for loan forgiveness on a PPP loan, there is no guarantee of forgiveness. The onus is on you, as the small business owner or loan recipient, to demonstrate that you meet all applicable program requirements for loan forgiveness. Lenders set out to review information about your loan eligibility and certain financial information about your business, including documentation about how the loan proceeds were used, as they evaluate whether to approve or deny your request for forgiveness. So, ultimately, one potential outcome of missing information or inaccurate information is that your application for loan forgiveness may be denied.
Of course, it is possible that your PPP lender might approve the loan forgiveness application even if the information contained within it is incorrect or incomplete. In this case, whether or not you are aware that the application omitted relevant information or contained false or misleading information, the IRS is unlikely to look kindly on you excluding the forgiven loan amount from your taxable income. As described earlier, you may be responsible for repaying any amount of the loan which was improperly forgiven plus interest. You may also face IRS fines, penalties, and interest, as well as state or local tax consequences, if applicable. Federal criminal charges are also possible. These potential consequences are discussed in more detail below.
Can I go to jail for an improperly forgiven PPP loan?
The short answer to this question is: "yes." If a portion (or all) of your PPP loan was forgiven improperly, you may be subject to IRS penalties as well as potential civil and criminal prosecution. Depending on the facts and circumstances, a variety of federal authorities may file charges against you for charges like wire fraud, bank fraud, making false representations to a financial institution, or conspiracy to commit fraud.
If the loan forgiveness was due to an honest error or mistake and you acted in good faith, as opposed to committing willful fraud or intentional omission or misrepresentation, the likelihood of facing jail time is reduced. However, if the government believes and is able to prove that you acted with intent to commit fraud, you could be facing time behind bars. That may be true even if the amount of the improperly forgiven PPP loan was relatively small.
Fraudulent loan forgiveness may result in serious penalties.
Ultimately, if you were the beneficiary of one or more PPP loans that were partially or completely forgiven, you are responsible for maintaining and providing documentation showing how you used the loan proceeds and documenting the number of employees or contractors you compensated with loan proceeds. Providing false statements or misleading information or intentionally omitting information for your loan forgiveness application may result in up to five years in prison, a civil fine of up to $250,000, or both.
Penalties also apply for loan fraud.
It is important to note that you may also face significant criminal penalties if it is determined you were not eligible to receive the PPP loan in the first place. This crime carries an additional potential civil penalty of up to $250,000, up to five years in prison, or both. These consequences are in addition to repayment of the full loan amount plus interest and potential civil penalties.
In other words, if you were not eligible for the PPP loan you received but this was not identified in the initial loan review or underwriting processes, then the loan may have also been automatically improperly forgiven -- even if the lender approved the application for loan forgiveness. In this scenario, you may be facing up to 10 years behind bars as well as up to $500,000 in federal government civil penalties. These crimes can also be prosecuted under state laws.
PPP fraud may lead to additional penalties.
The potential penalties for improperly forgiven PPP loans can vary based on the underlying facts and circumstances. In some cases, loan recipients may face federal and state charges under several different laws.
- Bank fraud. Knowingly submitting false or incomplete information to a financial institution when applying for a PPP loan or PPP loan forgiveness may result in bank fraud charges, which carry fines of up to $1 million, up to 30 years in prison, or both.
- Wire fraud and mail fraud. Applications for PPP loans and PPP loan forgiveness are subject to federal wire fraud and mail fraud statutes because applications use interstate wire communications and/or the U.S. mail. These statutes carry up to 20 years in jail and fines of up to $250,000.
- False Claims Act. Under the False Claims Act, each false claim carries up to $11,000 in civil penalties plus treble damages (three times the losses the government incurs).
- State PPP fraud charges. Improper PPP loan forgiveness may also trigger state-specific fraud charges, which may come with civil or criminal penalties.
If you have more questions about your taxes, loan forgiveness, or any other aspect of running your business, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.