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.
Clients executed personal and corporate guarantees for an SBA 7(a) loan from a Preferred Lender Provider (PLP). The borrower corporation defaulted on the loan exposing all collateral pledged by the Clients. The SBA subsequently acquired the loan balance from the PLP, including the right to collect against all guarantors. The SBA sent the Official Pre-Referral Notice to the guarantors giving them sixty (60) days to either pay the outstanding balance in full, negotiate a Repayment (Offer in Compromise (OIC) or Structured Workout (SW)), challenge their alleged guarantor liability or file a Request for Hearing (Appeals Petition) with the SBA Office of Hearings & Appeals.
Because the Clients were not financially eligible for an OIC, they opted for Structured Workout negotiations directly with the SBA before the debt was transferred to the Bureau of Fiscal Service, a division of the U.S. Department of Treasury for enforced collection.
The Firm was hired to negotiate a global Workout Agreement directly with the SBA to resolve the personal and corporate guarantees. After submitting the Structured Workout proposal, the assigned SBA Loan Specialist approved the requested terms in under ten (10) days without any lengthy back and forth negotiations.
The favorable terms of the Workout included an extended maturity at an affordable principal amount, along with a significantly reduced interest rate saving the Clients approximately $181,000 in administrative fees, penalties and interest (contract interest rate and Current Value of Funds Rate (CVFR)) as authorized by 31 U.S.C. § 3717(e) had the SBA loan been transferred to BFS.
Small business sole proprietor obtained an SBA COVID-EIDL loan for $500,000. Client defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for aggressive collection. Treasury added $180,000 in collection fees totaling $680,000+. Client tried to negotiate with Treasury but was only offered a 3-year or 10-year repayment plan. Client hired the Firm to represent before the SBA, Treasury and a Private Collection Agency. After securing government records through discovery and reviewing them, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury citing a host of purported violations. The Firm was able to negotiate a reinstatement and recall of the loan back to the SBA, participation in the Hardship Accommodation Plan, termination of Treasury's enforced collection and removal of the statutory collection fees.
Client’s small business obtained an SBA 7(a) loan for $750,000. She and her husband signed personal guarantees exposing all of their non-exempt income and assets. With just 18 months left on the maturity date and payment on the remaining balance, the Great Recession of 2008 hit, which ultimately caused the business to fail and default on the loan terms. The 7(a) lender accelerated and sent a demand for full payment of the remaining loan balance. The SBA lender’s note allowed for a default interest rate of about 7% per year. In response to the lender's aggressive collection action, Client's husband filed for Chapter 7 bankruptcy in an attempt to protect against their personal assets. However, his bankruptcy discharge did not relieve the Client's personal guarantee liability for the SBA debt. The SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection against the Client to the SBA. The Client then received the SBA Official 60-Day Notice. After conducting a Case Evaluation with her, she then hired the Firm to respond and negotiate on her behalf with just 34 days left before the impending referral to Treasury. The Client wanted to dispute the SBA’s alleged debt balance as stated in the 60-Day Notice by claiming the 7(a) lender failed to liquidate business collateral in a commercially reasonable manner - which if done properly - proceeds would have paid back the entire debt balance. However, due to time constraints, waivers contained in the SBA loan instruments, including the fact the Client was not able to inspect the SBA's records for investigation purposes before the remaining deadline, Client agreed to submit a Structured Workout for the alleged balance in response to the Official 60-Day Notice as she was not eligible for an Offer in Compromise (OIC) because of equity in non-exempt income and assets. After back and forth negotiations, the SBA Loan Specialist approved the Workout proposal, reducing the Client's purported liability by nearly $142,142.27 in accrued interest, and statutory collection fees. Without the Firm's intervention and subsequent approval of the Workout proposal, the Client's debt amount (with accrued interest, Treasury's statutory collection fee and Treasury's interest based on the Current Value of Funds Rate (CVFR) would have been nearly $291,030.
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