PPP loans received by individuals and businesses under the CARES Act will be audited (“reviewed”) by the SBA. The new Economic Aid Act also requires the SBA to submit a forgiveness audit plan within 45 days of its enactment and to report every 30 days thereafter. In addition, the Economic Aid Act now allocates $ 50 million for PPP audits and fraud mitigation efforts. PPP loans of $ 2 million or more will automatically be audited by the SBA. Many PPP loans under $ 2 million will also be audited.

Audits of PPP loans are managed by the SBA. Borrowers often receive notification of the audit through their lending bank, but the SBA also notifies PPP borrowers directly. The SBA receives support from the Internal Revenue Service and other federal agencies in these audits, which may also involve criminal investigations.

PPP loan audits request documents and information from the borrower, including income tax and employment tax returns, payroll records, financial statements, and bank account statements, including information deposit and payment, in order to verify the information declared by the borrower on the PPP loan application. However, the SBA’s PPP loan audits focus on much more.

SBA audits of PPP loans have already started and focus on whether the individual or business was qualified to receive a PPP loan (i.e. eligibility) and whether the borrower has correctly calculated the amount of his PPP loan. Specific issues considered by the SBA in these audits include the “economic necessity” of a PPP loan and issues related to “workforce”, including affiliation with other companies, the appropriate “NAICS” code for the business and whether the business has counted all employees – full-time, part-time, and even temporary – in filing the loan application. The SBA is also looking at other “business-specific” borrower issues.

The PPP loan application contains a certificate from the borrower that “[c]the current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations.This same certification is also required in new PPP loan applications under the Economic Aid Act. For borrowers who have received PPP loans of less than $ 2 million, the borrower is deemed by the SBA to have made this “economic necessity” certification in “good faith” and, therefore, the SBA may not consider specifically this issue during borrowers who received loans under $ 2 million. However, for PPP loans of $ 2 million or more, borrowers are not eligible for this “good faith presumption of economic necessity,” and the SBA will verify this.

To facilitate its audit efforts, the SBA requires that every for-profit borrower who has received a PPP loan of more than $ 2 million complete a “loan necessity questionnaire” (SBA form 3509). The SBA states that “the information gathered will be used to inform the SBA exam” of the “economic necessity” certification. The borrower has a limited period of 10 days to complete and return the questionnaire to the lending bank, and the bank then provides the completed questionnaire to the SBA.

If a borrower requests the forgiveness of a PPP loan, the SBA has 90 days to review the forgiveness decision made by the lending bank. In practice, if a borrower requests a discount, it can trigger or at least speed up a full SBA audit of the PPP loan.

Once an SBA PPP loan audit is completed and an unfavorable audit decision is made by the SBA including that the borrower may not be eligible for the loan, then the borrower has rights. administrative appeal within the SBA to have the audit decision reviewed, which may lead to a hearing before a federal administrative law judge.

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