SBA Forgiveness: What Small Business Owners Need to Know
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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 several trust deeds pledging seven (7) real estate properties and unconditional personal guarantees for an SBA 7(a) loan from the participating lender. The clients' small business failed and eventually defaulted on repayment of the loan exposing all collateral pledged by the clients. The SBA subsequently acquired the loan balance from the lender, including the right to liquidate and collect all pledged collateral pursuant to the trust deed instruments.
The Firm was hired to negotiate separate release of lien proposals for all 7 real estate properties. In preparation for the work assignment, the Firm Attorneys initiated discovery to secure records from the SBA and Treasury's Bureau of Fiscal Service. After reviewing the records and understanding the interplay between the lender and the SBA, the attorneys then prepared, submitted and negotiated the release of lien (ROL) for each of the 7 real estate properties for consideration.
After submitting the proposals, the assigned SBA Loan Specialists approved each ROL package - significantly reducing the total SBA debt claimed.
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.
Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
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