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The federal Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERTC) were supposed to serve as financial lifelines during the COVID-19 pandemic—and they did for many businesses. But, fraud under both of these programs also proved to be a significant issue, with conservative estimates putting the total cost of PPP and ERTC fraud in the tens of billions of dollars.

As a result, the Internal Revenue Service (IRS) is now scrutinizing the returns of businesses that received PPP loans and claimed the ERTC—and its Criminal Investigation division (IRS CI) is pursuing criminal charges against business owners in many cases. While it was possible for businesses to lawfully take advantage of both programs, the IRS and IRS CI are looking for several red flags when deciding whether to pursue tax audits and criminal tax fraud investigations.

5 Red Flags for PPP and ERTC Fraud

What are some of the red flags that can trigger audits and investigations for PPP loan and ERTC recipients? Here are five examples:

1. PPP Loan Ineligibility

The IRS and IRS CI (among other federal agencies) are currently in the process of going back and reviewing suspect PPP loan applications. If a PPP loan recipient was ineligible for the loan it received, this can trigger in-depth scrutiny and present the risk for civil penalties or criminal prosecution related to both the PPP and the ERTC.

2. PPP Loan Forgiveness Ineligibility

Improperly certifying eligibility for PPP loan forgiveness can lead to audits and investigations as well. Business owners are required to certify their forgiveness eligibility under penalty of perjury, and fraudulent certifications are triggering criminal prosecution in many cases.

3. ERTC Ineligibility

Similar to PPP loans and PPP loan forgiveness, the ERTC is subject to various eligibility criteria. If evidence uncovered during an audit or investigation suggests that a business has improperly claimed the ERTC, this can lead to scrutiny of the business’s PPP documentation as well.

4. Claiming the ERTC for Wages Paid with PPP Funds

Businesses that used PPP funds to pay employee wages cannot use these wages to claim the ERTC. If an audit of a business’s tax returns reveals that the business improperly calculated the credit, revenue agents may refer the matter to IRS CI for criminal investigation.

5. Inconsistencies Between Businesses’ PPP Loan Documents and Tax Returns

Inconsistencies between the representations made on businesses’ PPP loan documents and in their tax returns can also lead to civil or criminal enforcement. While civil enforcement actions can result in liability for back taxes, interest and penalties, criminal prosecution for PPP or ERTC fraud can lead to fines and federal prison time.

Contact Tax Attorney Kevin E. Thorn in New Jersey for More Information

If you need to know more about the risks of facing IRS or IRS CI scrutiny related to your business’s PPP loan or employee retention tax credits, we encourage you to contact us promptly. Call 201-842-7696, email ket@thornlawgroup.com or send us a message online to arrange a consultation with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group.