The Coronavirus Aid, Relief, and Economic Securities (CARES) Act permitted Congress to create the Paycheck Protection Program (PPP). This federal program then allowed the government to send out billions of dollars of funds to qualifying entities. Congress was very clear that it intended these loans to qualify for forgiveness, as long as the entity used the funds for payroll, rent, utilities and interest on mortgages.
Will the loans qualify for forgiveness?
At this time, it appears they will if the entity used the loan as Congress instructed. The government has stated it will move forward with audits to verify qualifying entities used the loans in an appropriate manner.
Which businesses will be subject to an audit?
In April of 2020, then Treasury Secretary, Steven Mnuchin stated every company that got $2,000,000 or more in PPP funds would be subject to an audit. The auditor will likely look through records to see how the business used the funds. Since the types of expenditures that give rise to forgiveness are pretty regular expenses faced by businesses every single day, meeting this obligation should not prove difficult.
What will the auditor look for?
The auditors will likely review bookkeeping and evidence to support that the business used the funds for qualifying expenses.
Ideally, businesses will be able to show that they had controls in place to better ensure accurate record keeping practices. Having these controls is important, as auditors will look for the ability to override entries as a way to support allegations of fraud.
Auditors will also look for material misstatements, either intentional or a mistaken error.
Should we be worried?
Business leaders are wise to note that millions are at stake, and the IRS criminal investigation unit has stepped up enforcement and investigation efforts related to COVID-19 fraud. As such, the government is taking the process very seriously.
Those who receive notification of an audit are also wise to not make light of the situation. Businesses in this situation do not have to go through the process alone — you are allowed to hire legal counsel. The attorneys at Goldburd McCone are familiar with these types of issues and can help guide your business through the process.