The Internal Revenue Service (IRS) is beginning to clamp down on improperly forgiven PPP Loans. In a memorandum from its Office of Chief Counsel, the improperly forgiven portion of any PPP Loan is now subject to income tax.
The IRS is saying that taxpayers having their loans forgiven based upon misrepresentations or omissions of fact should take steps to immediately amend the income tax returns in question to pay an appropriate tax. These returns would also be subject to interest and penalty.
In the government’s rush to get money out on the street in the middle of the pandemic, it’s estimated that as many as 10% of loan recipients shouldn’t have received their loans in the first place. Many of the organizations who provided the loans automated the forgiveness process, making it even easier for loans to be forgiven based upon illegal circumstances. In many instances, no evidence was required in the forgiveness process.
Under the terms of the PPP, an eligible employer needed to meet three conditions to properly receive forgiveness on the loan.
1 – The employer must be a small business concern that was in business prior to February 15, 2020, having employees or being self-employed.
2 – The loan proceeds were used for eligible expenses.
3 – The loan recipient applied for forgiveness, verifying certain financial information, and attesting to other legal requirements.
If all of those requirements were met, then the loan recipient could exclude PPP loan forgiveness from income. If not, then no and that portion is taxable.
Let me leave you with this.
The increased enforcement actions of the Service in response to PPP Loan Fraud was predictable. Given the gross amounts of fraud that are yet to be prosecuted, it only makes sense for the IRS to take over the majority of these prosecutions from the Justice Department.
The $80B increase and additional 87K agents that the IRS is now hiring and training will provide them with the manpower and expertise to go after these companies. It won’t happen right away, because the new hires will take time to train, but it will certainly happen.
If you find your company in a position where there’s a difficulty, then I’d suggest that you be proactive rather than reactive. If returns need to be amended, get to it today rather than tomorrow.
We’re all going to get through this. Let’s get through it together.
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