Listen up all recipients of Paycheck Protection Program loans. Did you think the government was going to forgive a loan and let that be that? Not a chance! This is especially true after it came to light that large companies with adequate cash reserves were taking PPP loan proceeds. The Treasury Secretary has now confirmed what my reliable source at the IRS told me – that all businesses that borrow money from the federal Paycheck Protection Program can expect to be audited before the loan is forgiven.
In the most updated Regs published April 29, 2020, it provides,
Question: Will SBA review individual PPP loan files?
Answer: Yes. . . SBA reminded all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.
While the government has stated that recipients of loans of over more than $2 million will have the most stringent audits, do not think you will escape an audit if you had a smaller loan.
The IRS has increased manpower to perform those audits as well. In 2019 the IRS hired more people than it had in about a decade – 10,000 individuals – and last year was the first year in my career that they were auditing a taxpayer’s current return. That means that after years of backlog, I began seeing the IRS audit returns that had just been filed four months prior. Today, the IRS put out an announcement stating there are openings for revenue agents (which are auditors) to audit employer sponsored retirement plans, but we all know where those agents are going to be repurposed.
Not only do you need to audit proof your records for the forgiveness application audit, but you need to prepare for a potential audit of your 2020 return. As I have mentioned before on my blog and in my webinar, one of the most advantageous features of the PPP loan is that if the loan is forgiven, it is not considered taxable income as forgiven loans usually are. That said, the IRS is not going to give you a double benefit. The expenses that you pay with forgiven loan proceeds are not going to be deductible otherwise. For example, if I pay my May rent with PPP loan proceeds and that loan is forgiven in a few months, I cannot deduct my May rent as an ordinary and necessary business expense when I file my tax return in 2020. How many people are going to remember that when they give their books to a CPA?
Please do not be overconfident with your ability to withstand an IRS audit. They are brutal. Give us a call, and the Law Offices of Christy Lee, P.C. will help you get your books in order so that your loan can be forgiven and you survive that audit.