Is this PPP fraud? Would you continue to work with these clients?

[mactaxes]

We are starting to see a disturbing trend with some of our clients and the PPP loans: we now have 3 clients, very small Sub-S corps with 1-3 employees (including the owners), who are applying for and receiving PPP funds even though they have had no drop in revenues from the coronavirus shutdowns so far. One claims his banker told him that he should apply because the PPP funds were for businesses who were already struggling before the shutdowns, to give them a “leg up.” Another has said that he has done his reading and doesn’t believe he has to show or certify a drop in income in order to qualify for the PPP. It is our understanding that certifications must be made that the PPP funds are necessary to maintain payroll and to support operations because the business has suffered economic harm from the coronavirus shutdowns. The third client believes his business may someday be affected and so he says he feels justified in applying for and accepting these funds ($30K) “because everyone else is getting them.” This all feels completely contrary to the intent of the Paycheck Protection Program and is starting to feel a bit like fraud. Would you continue to work with these clients? Has anyone else run into this? And if so, are you keeping these folks on as clients? To make matters worse, they are now asking for our assistance and advice on the logistics of using these funds, which is becoming increasingly uncomfortable knowing what we know...

[Rapid Robert]

I prepare and file tax returns, not loan applications. People applying for loans probably lie and cheat just as much as the banks themselves do.

[TaxGuyBill]

This is just my viewpoint/opinion: We are not the loan-police. We prepare tax returns, so whether or not they take a loan should not affect our business relationship with them.

But do I understand your feelings, and yes, it is probably against the intent, and greed is rampant. But again, it is not our job to judge or enforce that. There is nothing wrong with providing a client with information in connection with their tax returns and for tax-planning.

If you suspect your client is being dishonest in the information that they give you for preparing a tax return, I agree, you may want to drop the client. But it is not our job to judge whether or not they should receive a loan. News media, websites and loan officers are basically telling people that they should apply for PPP no matter what, and they neglect to mention the certification. Many people aren't really aware of the certification, and most people don't read the fine-print when signing something (such as a loan application). But they are being pressured into taking the 'free money', and being pressured to do it FAST because the money won't last long.


One clarification about the certification: I don't think the official certification has anything directly to do with the coronavirus. The pertinent part is "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant".

[Happy Camper]

I feel your struggle mactaxes! Unfortunately, I have seen the same thing. I even heard of an accounting firm in my area that got a PPP loan but did not close and the only 'slow down' was because the tax due date changed. The frustrating thing is the companies taking it that don't need it because they have not experienced a drop in revenue are taking it away from the companies that DO need it. I for one would feel so much guilt seeing closed businesses that may have been able to stay open if I had not taken the 'Free money'.

Hopefully your clients are aware of the US Treasury Q & A questions as follows-the 'payback date' has been extended until May 14 & the SBA is expecting to provide additional guidance related to this issue by then.

31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.11 ( 11 Question 31 published April 23, 2020.)


37. Question: Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

Answer: See response to FAQ #31.14 (14 Question 37 published April 28, 2020.)

[mactaxes]

Thank you all for the needed perspective. I know it’s not our place to judge, but It is difficult when there are so many businesses out there in need. We probably became more “involved” than we should’ve with these clients and their PPP applications because we also prepare their payroll tax returns. And so while asking us for past records and payroll reports, they are also asking for advice and specifics and then disclosing more than we wanted/needed to know in the process. It sounds like we will need to develop a policy of not advising on PPP unless it specifically relates to tax planning and stick to preparing and filing returns only. Thank you again for the comments and advice.

[Burke]

. It sounds like we will need to develop a policy of not advising on PPP unless it specifically relates to tax planning and stick to preparing and filing returns only. Thank you again for the comments and advice.

And that sounds like a good business practice. You can certainly let them know what the specific rule is regarding economic necessity of the PPP. Other than that, no advice one way or another. The IRS, thank goodness, has not put a "due diligence" requirement on the preparer in this particular circumstance. And I would scream bloody murder if they did. However, I don't know if it lets the banks/loan officers off the hook if they are giving out such advice as you mention.