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IRS Won’t Audit Businesses that Borrowed Less than $2M from PPP

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As the COVID-19 crisis swept across the U.S., the Paycheck Protection Program (PPP) supplied small and big businesses alike with a lifeline to counter the unprecedented economic impact of the pandemic. The PPP provides forgivable loans to businesses to cover the costs of payroll and other expenses necessary to keep businesses going and people employed in times of economic instability.

According to the U.S. Treasury Department and the Small Business Administration (SBA), businesses that borrowed $2 million or less won’t be audited by federal authorities to verify whether there was a substantial economic need for the loan. Instead, they’re deemed to have made the certification in good faith that “current economic uncertainty” made the request essential.

How Does the Paycheck Protection Program Work?

The SBA provides businesses in the U.S. with funds to retain and keep employees on the payroll through the Paycheck Protection Program. This forgivable loan program covers the costs of payroll, mortgage interest, and other business expenses for up to eight weeks.

Since the beginning of the coronavirus crisis in the U.S., over 4.9 million PPP loans have been taken out, amounting to more than $310 billion, to enable employers to keep staff on board. Through the PPP, the SBA will grant loan forgiveness if businesses can prove they met all standards for employee retention and that the funds went toward necessary and qualified expenses.

Companies had until May 18 to repay any borrowed loans through the PPP. Those that do not repay borrowed funds and seek loan forgiveness should anticipate an audit from the SBA to certify that the loan was necessary due to economic uncertainty and was spent appropriately. No matter the amount borrowed, businesses should maintain detailed records demonstrating how funds were spent. If they need to apply for loan forgiveness, these records are essential evidence that will be needed during an audit.

What New Approach is the IRS Taking to Audit PPP Loans?

Considering the millions of firms that have applied for this lifeline to keep their businesses and employees afloat, the IRS announced that borrowers with less than $2 million in PPP loan debt won’t need to worry about an audit when applying for loan forgiveness. Instead, they’ll be given “safe harbor,” meaning an audit won’t confront them.

Glen Birnbaum, CPA at Heinold Banwart in Illinois, explained to CNBC:

“If you’re under the $2 million threshold, you get this automatic certification in good faith… Though borrowers under the $2 million mark may be in the clear as far as whether they can certify a need for the loan, they could still face scrutiny when it comes to forgiveness of the loan, depending on the guidance that comes out.”

The IRS explains that this approach is now being used to manage the large number of PPP loans that the coronavirus crisis has prompted. By focusing on businesses with more substantial loans, the SBA can use its limited audit resources effectively.

What Do Firms Who Have Borrowed from the PPP Need to Know?

Any business owner or entrepreneur who’s borrowed less than $2 million in PPP loans can breathe a sigh of relief. If they seek loan forgiveness, they won’t have to prepare for an audit to verify that it was needed for business operations.

On the other hand, firms that have borrowed more than $2 million in PPP loans will face a thorough examination from the SBA and IRS if they keep the borrowed funds and apply for loan forgiveness. According to the IRS FAQ page, if the SBA finds that a firm did not have sufficient basis for declaring that the loan was necessary, it would be ineligible for loan forgiveness and the full balance of the loan must be repaid.

Call Trusted Tax Debt Attorney in Orange, California, for a Consultation

State and Federal tax laws are complex, and there’s often a significant amount of confusion concerning new tax laws and methods. If you’re confronted with tax debt or have any questions relating to problems with the IRS, SBA, or State, you could benefit significantly from speaking with a knowledgeable tax debt attorney.

Morgan Sebastian Law, PC, is a tax debt law firm in Orange, California, advocating for taxpayers before the IRS in all 50 states. Attorney Becky Rose Sebastian has vast experience engaging in negotiations with tax agencies to provide her clients with the most favorable tax solution. To schedule a consultation and speak with a tax settlement lawyer, call 877-938-1350 today or complete our contact form.