COVID EIDL loan business closure review? Learn the warning signs that trigger an SBA EIDL loan audit investigation
Book a Consultation CallThe COVID Economic Injury Disaster Loan (COVID EIDL) program proved to be a financial lifeline for countless small businesses during the COVID-19 pandemic. Designed to help cover operating costs and support payroll, EIDL loans offered critical relief. Unfortunately, the failure to conduct due diligence and rapid rollout of these funds without performing comprehensive underwriting left room for misreporting, misrepresentation and fraud, prompting SBA investigators and auditors to take a closer look at recipients’ applications, tax and financial records.
If you received a COVID EIDL loan, it’s essential to stay informed about the warning signs that can trigger scrutiny from SBA loan specialists. Below are some key factors that could spark an audit or, in severe cases, lead to fraud allegations.
When you applied for the COVID EIDL loan, you were required to disclose specifics about your revenue, expenses, and losses. If any of these figures were significantly exaggerated or understated, SBA investigators might question the accuracy of your claims. Common mistakes or misrepresentations include:
If you suspect that any part of your application may not be completely accurate, you should consult a legal professional as soon as possible. Being transparent early on can help resolve unintentional errors before they escalate.
Another frequent area of concern is payroll data. The COVID EIDL program often looked at employee counts and salary expenses to determine how much assistance you needed. If a business reported a higher number of employees or boosted payroll figures to obtain a larger loan, it may catch an SBA auditor’s attention.
Signs of misreporting include:
Double-check all payroll records against your tax documents to ensure consistency. If mistakes happen, they should be addressed swiftly and with full disclosure.
COVID EIDL loans come with clear guidelines regarding permissible expenses, such as payroll, utilities, or rent. Using these funds for unrelated or personal costs can quickly lead to allegations of fraud. Additionally, improper and excessive distributions or draws could also be investigated as non-compliant behavior leading to unwanted scrutiny. Examples of improper spending include:
Maintaining a dedicated account or ledger for all loan expenditures can help clarify where every dollar is going and whether it aligns with the SBA COVID EIDL program’s rules and regulations.
Some small businesses that claimed severe losses during the pandemic later rebounded quickly or saw sales remain steady. While there’s nothing inherently wrong with recovery or growth, SBA investigators may look twice if the reported losses conflict heavily with subsequent financial statements and tax return filings. Be ready to explain:
Providing clear, consistent documentation and thorough explanations of any shifts in revenue can help stave off suspicions.
If you are selected for a COVID EIDL business review or audit, the SBA will likely request additional information and documents. Failing to respond promptly or submitting partial data in response to the SBA auditor’s Information Document Request (“IDR”) can raise suspicions. In some cases, ongoing unresponsiveness could even lead to an escalation of the investigation.
To avoid negative outcomes, always:
Finally, any indication of multiple COVID EIDL applications under different business names, addresses, or personal details signals a red flag for fraud. The SBA actively monitors duplicate submissions and may pursue legal action against those found to be repeatedly applying under false pretenses.
Keep Detailed Records: Document every transaction related to the COVID EIDL funds, including payroll expenses and other allowable costs. Organized, up-to-date financial records are your best defense in an audit.
Maintain Transparency: If you realize there’s been an accidental oversight or mistake in your application or financial reporting, address it proactively. Offering corrections on your own can demonstrate good faith.
Consult Legal Experts: COVID EIDL loan rules can be complex. If you suspect any discrepancies, speaking with qualified legal counsel can help you understand your options and mitigate risks before SBA investigators and auditors become involved.
Separate Business and Personal Finances: Using separate bank accounts for business transactions helps clarify how funds are spent. This practice simplifies the auditing process and reduces the likelihood of accusations that you used the loan for ineligible purposes.
The EIDL program played an essential role in supporting small businesses hit hard by the COVID-19 pandemic. However, its success also drew heightened scrutiny from government agencies determined to prevent and uncover fraud. By recognizing the warning signs, maintaining thorough documentation, and seeking professional legal advice where necessary, you can reduce the chances of an audit turning into a review for False Claims Act violations, or worse – a criminal fraud investigation. Stay organized, stay transparent, and stay informed.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Client personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture. After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against his monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars. We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA). As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy) but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.
Clients borrowed and personally guaranteed an SBA 7(a) loan. Clients defaulted on the SBA loan and were sued in federal district court for breach of contract. The SBA lender demanded the Client pledge several personal real estate properties as collateral to reinstate and secure the defaulted SBA loan. We were subsequently hired to intervene and aggressively defend the lawsuit. After several months of litigation, our attorneys negotiated a reinstatement of the SBA loan and a structured workout that did not involve any liens against the Client's personal real estate holdings.
Our firm successfully facilitated the SBA settlement of a COVID-19 Economic Injury Disaster Loan (EIDL) where borrower received an SBA disaster loan of $150,000, but due to the severe economic impact of the COVID-19 pandemic, the business was unable to recover.
Despite the borrower’s efforts to maintain operations, shutdowns and restrictions significantly reduced the customer base and revenue, making continued operations unsustainable. After a thorough business closure review, we negotiated with the SBA, securing a resolution where the borrower paid only $6,015 to release the collateral, with no further financial liability for the owner/officer.
This case demonstrates how businesses affected by the pandemic can navigate SBA loan settlements effectively. If your business is struggling with an SBA EIDL loan, we specialize in SBA Offer in Compromise (SBA OIC) solutions to help close outstanding debts while minimizing financial burden.
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