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 SBA 7(a) loan balance of $58,000. The client received a notice of Intent to initiate Administrative Wage Garnishment (AWG) Proceedings. We represented the client at the hearing and successfully defeated the AWG Order based on several legal and equitable grounds.
Clients personally guaranteed an SBA 504 loan balance of $337,000. The Third Party Lender had obtained a Judgment against the clients. We represented clients before the SBA and negotiated an SBA OIC that was accepted for $30,000.
Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement. The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.
The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.
The Firm was hired to investigate and find an alternate solution to the bankruptcy option. After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.
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