Congress generated much excitement when it enacted legislation so that small businesses could receive Paycheck Protection Program (PPP) loans that were potentially forgivable and that would not have to be counted as taxable income. However, even to the surprise of many in Congress, IRS has been working to undo part of that benefit. The IRS released Notice 2020-32, on April 30 taking the position that expenses paid for by PPP loans won't be tax-deductible, although the kinds of expenses that it pays (such as payroll and rent) would normally be deductible. This IRS interpretation appears contrary to the intent of Congress, and many there have already stated an intent to override the IRS position with additional legislation. It is very likely that relief will be forthcoming from Congress.
At the same time, the government has been giving warning that it intends to audit many PPP loans, and may pursue criminal prosecution in some cases. The first category of at risk cases are those in which the applicant lied on the application. In one early case where the US has brought criminal charges (U.S. v. Staveley), it involved representations that the applicant owned a company that he did not own. However, the government has also stated that it will pursue charges where a misrepresentation was made as to the economic necessity of the loan.
The Treasury Department and SBA issued updated “Frequently Asked Questions (FAQs)” on April 23 (after many had already received PPP funds) stating that a borrower’s good faith certification as to “economic necessity” must take into account the borrower’s “ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
This aggressive position by the US has caused widespread panic among business owners, and even caused some to return their loans. The US even encouraged this reaction by stating that it would treat loans returned by May 14 as having been applied for in good faith.
However, for most business owners who are feeling stress over this, it is an overreaction. The economic situation appeared so dire when many businesses were applying for these loans, that attacking an application based on "economic necessity" alone would be hard for the US in most cases.
To alleviate some of the widespread panic that it caused with its ever changing guidelines, the SBA recently issued addition guidance that businesses that accepted PPP loans of less than $2 million will be assumed to have made the certification on the necessity of their loan in good faith. Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza also announced that the SBA would review all PPP loans in excess of $2 million (in addition to some loans less than that) to make sure borrowers’ self-certification for the loans was accurate.
The cases where the most danger actually exists will be where a business has obtained a loan of $2 million or more, and has made very large distributions to owners immediately after the loans were obtained or where the company had very large cash reserves or access to capital.
Under the IRS' People First Initiative, 2019 individual and business income tax returns are not due until July 15, 2020. IRS has also suspended new liens and levy of property until July 15. Most IRS employees have not been at work through the crisis, or have been working from home. However, more are returning to work each week. I expect a flurry of collection activity during the Summer as July 15 arrives and IRS is back at work-- although it may still be challenging getting through to IRS to work out relief due to backlog caused by the crisis, and heavy volumes of Taxpayers trying to call IRS about the notices that they will receive. To the extent possible, it will be beneficial to have everything ready to obtain relief once IRS returns to full force.
IRS Enforcement Priorities for 2020 - Syndicated Conservation Easements and Captive Insurance Companies
One thing that the IRS Commissioner has emphasized at every opportunity is the intention of IRS to go after the things this year that IRS considers illegitimate tax evasion schemes. IRS is especially focused this year on captive insurance companies and syndicated conservation easement. Anyone who has been placed into one of these entities by a promoter should seek counsel from a tax attorney immediately, in order to get ahead of the problem.
Cal Bomar is a former IRS Chief Counsel attorney who represents clients in IRS and state tax audits, Tax Court disputes and tax relief.