IRS crackdown on improper PPP forgiveness

The PPP loan program was established to help small businesses that were adversely affected by the COVID-19 pandemic.

Many people who received the PPP loan forgiveness were qualified and used the loan proceeds properly to pay eligible expenses. However, the IRS has discovered that some businesses that received loan forgiveness did not meet one or more of the eligibility conditions.

A recent IRS news bulletin encourages people who inappropriately obtained forgiveness of their PPP loans to take steps to become compliant. Becoming compliant will allow people to avoid the potential consequences.

The news bulletin highlighted the Chief Council Advice which addressed misrepresentations and omissions of facts regarding loan forgiveness.

IRS Commissioner Chuck Rettig said, “This action underscores the Internal Revenues Services’ commitment to ensuring that all taxpayers are paying their fair share of taxes”. He added, “We want to make sure that those who are abusing such programs are held accountable, and we will consider all available treatment and penalty streams to address the abuses.”

If you misrepresented facts for PPP loan forgiveness, filing an amended tax return can enable you to become compliant.

Under the terms of the PPP loan program, lenders can forgive the full amount of the loan if the loan recipient meets three conditions.

  1. The loan recipient was eligible to receive the PPP loan. An eligible loan recipient:
  • is a small business, independent contractor, eligible self-employed individual, sole proprietor, business, or a certain type of tax-exempt entity; 
  • was in business on or before February 15, 2020; and
  • had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
  1. The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities. 
  2. The loan recipient had to apply for loan forgiveness. The loan forgiveness application required a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.

If the three conditions above are met, then under the PPP loan program the forgiven portion is excluded from income. If the conditions are not met, then the amount of the loan proceeds that were forgiven but do not meet the conditions must be included in income and any additional income tax must be paid.

Anyone who has abused the PPP forgiveness rules can avoid potential IRS penalties by correcting their information with an amended return.

David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at zublerdavid@gmail.com

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