Payroll Fraud in PPP Loan Forgiveness Applications

Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek. We’ve defended federal fraud cases for over 40 years combined. If you’re accused of payroll fraud in your PPP loan forgiveness application, you’re facing federal wire fraud charges that carry 20 years in prison. Forgiveness application fraud is often easier for prosecutors to prove than initial loan fraud because the misuse of funds is documented in your bank records.

We defend PPP forgiveness fraud cases. Our team understands how prosecutors build these cases and where the defenses are. Payroll fraud in forgiveness applications takes many forms – inflated payroll numbers, fake employees, altered bank statements, fabricated 1099s. Each requires different defense strategies.

How PPP Loan Forgiveness Worked

To get your PPP loan forgiven, you had to prove you spent at least 60% on payroll costs and the remaining 40% on approved non-payroll expenses during the covered period. The forgiveness application required documentation: payroll tax filings, bank statements showing payroll deposits, proof of retirement and health insurance contributions.

You also made certifications. You certified the documentation was true and accurate. You certified the funds were used for authorized purposes. You certified you complied with PPP requirements. Those certifications are legally binding – if they’re false, you committed fraud.

The SBA reviewed forgiveness applications. For loans under $150,000, review was often minimal. For larger loans, review was more detailed. Some loans got approved quickly, others took months of back-and-forth requesting additional documentation.

But approval doesn’t mean you’re safe. The SBA can audit forgiven loans for six years. If they discover fraud during an audit, they’ll refer the case for criminal prosecution and demand repayment plus penalties.

Types of Payroll Fraud in Forgiveness Applications

Inflating payroll expenses is the most common fraud. You received a $100,000 PPP loan. You needed to show $60,000 in payroll costs to get full forgiveness. But you only spent $40,000 on payroll. So you inflated the numbers – claimed you paid employees more than you actually did, or claimed you had more employees than you actually had.

Prosecutors prove this by comparing your forgiveness application to your bank records. Your application says you spent $60,000 on payroll. Your bank statements show $40,000 in payroll deposits. That $20,000 discrepancy is evidence of fraud.

Fake employees appear in many cases. You claimed you paid salaries to 5 employees during the covered period. You submitted payroll records showing their names, wages, tax withholdings. But those employees don’t exist, or they exist but didn’t work during that period, or they worked but earned far less than you claimed.

The government interviews the supposed employees. They say they never worked for you, or they confirm they worked but their actual pay was half what you reported. Your forgiveness application falls apart.

Family members on payroll who don’t actually work create gray areas. Your spouse or child is technically an employee, they’re on payroll for tax purposes, but they don’t do any real work. You included their “wages” in your forgiveness application payroll calculations. Is that fraud?

It depends. If they legitimately work for the business and earn reasonable wages, including them is proper. If they’re phantom employees who collect paychecks but don’t work, that’s fraud. Prosecutors look at what work they actually performed, whether their compensation was reasonable, whether they were employees before the pandemic or added just for PPP purposes.

Altered documentation is clear fraud. You changed bank statements to inflate payroll deposits. You created fake IRS Form 941s showing higher payroll taxes than you actually paid. You forged employee signatures on payroll records. This is document fabrication – it’s not a mistake or misunderstanding, it’s intentional fraud.

The Owner Compensation Problem

Owner compensation caps tripped up many self-employed borrowers. If you’re self-employed with no employees, your forgiveness was capped at the 2.5-month equivalent of your 2019 net profit, up to $20,833 for first-draw loans.

Take a sole proprietor who received a $50,000 PPP loan based on $200,000 in 2019 net profit. They applied for full forgiveness, claiming they used all $50,000 for business expenses. But their actual forgivable amount was capped at $20,833. The excess $29,167 wasn’t forgivable regardless of how they spent it.

If they certified on their forgiveness application that they spent funds according to PPP rules and are entitled to full forgiveness, that certification was false. Whether it’s criminal fraud depends on intent – did they know about the cap and lie anyway, or did they genuinely not understand the owner compensation limits?

How Prosecutors Build Payroll Fraud Cases

Bank statements are primary evidence. Every payroll deposit, every check to employees, every ACH transfer for payroll taxes – it’s all documented in bank records. Prosecutors subpoena your bank statements for the covered period and trace where your PPP funds went.

If your forgiveness application claims $80,000 in payroll but your bank records show $50,000 in actual payroll payments, prosecutors have strong evidence of fraud. The gap between what you claimed and what you actually spent is the alleged fraud amount.

IRS records confirm payroll taxes. Form 941 reports quarterly payroll taxes and must match your forgiveness application payroll amounts. If your forgiveness application claims $60,000 in payroll for the covered period, your 941 should show wages of approximately $60,000 for that quarter. If it shows $35,000, there’s a discrepancy.

State unemployment filings provide additional verification. Most states require quarterly reporting of wages paid for unemployment insurance. Those reports should match your federal payroll reports and your PPP forgiveness application. If they don’t, prosecutors will ask why.

Employee interviews catch lies. If you claimed you paid 6 employees during the covered period, prosecutors will find those employees and interview them. They’ll ask what they earned, when they worked, how they were paid. If the employees’ statements contradict your forgiveness application, you’re in trouble.

Third-party records matter. Your payroll service provider keeps records. Your accountant has files. Your health insurance provider knows which employees had coverage and what premiums you paid. Prosecutors subpoena all of this to verify your forgiveness application claims.

Defenses Against Payroll Fraud Allegations

Good faith mistake is your strongest defense. You genuinely believed you calculated payroll costs correctly, you tried to follow the guidance, you made errors but didn’t intend to defraud. Fraud requires intent – honest mistakes aren’t criminal.

Proving good faith requires documentation. Show your work – how you calculated payroll costs, what expenses you included, what guidance you relied on. If you kept worksheets, notes, emails with your accountant showing how you prepared the forgiveness application, those support good faith.

We represented a client who included health insurance premiums in payroll costs but calculated them wrong. She included the full annual premium instead of just the covered period. The error inflated her payroll costs by $18,000. We produced her calculation worksheets showing she tried to follow the SBA guidance but misunderstood the proration. The SBA reduced her forgiveness but didn’t refer for prosecution.

Reliance on professional advice supports lack of intent. Your accountant prepared your forgiveness application, calculated the payroll costs, submitted the documentation. You relied on their expertise. If they made errors, that’s not your fraud.

This defense requires proof. You need documentation showing your accountant handled the forgiveness application, not just your testimony. Emails, engagement letters, worksheets they prepared. Without documentation, claiming “my accountant did it” years later isn’t credible.

Reasonable interpretation of ambiguous requirements can be a defense. PPP guidance changed frequently. Different sources provided conflicting information. If you interpreted a requirement reasonably based on available guidance, even if your interpretation was wrong, that supports good faith.

Errors that didn’t affect the outcome can support lack of materiality. If you made a $5,000 error in payroll calculations but your actual payroll expenses were still well above the 60% threshold required for full forgiveness, the error didn’t change the result. Prosecutors might not pursue charges for immaterial misstatements.

The Certification Problem

PPP forgiveness applications required certifications. You certified the information was true and accurate. You certified you complied with PPP requirements. You certified you understood that false statements could result in criminal prosecution.

Those certifications are critical to the government’s case. Even if your payroll calculations were only slightly wrong, if you certified they were accurate when you knew they weren’t, that’s fraud. The certification makes any inaccuracy into a false statement.

This is where prosecutors have leverage. They don’t have to prove you intended to defraud the PPP program generally – they just have to prove you knowingly made false certifications to obtain loan forgiveness. If you knew your payroll numbers were inflated but certified them as accurate anyway, that’s enough.

Defending against certification fraud requires proving you believed the information was accurate when you certified it. You didn’t know about errors, or you believed they were immaterial, or you relied on professional advice that the numbers were correct. Without that proof, the certification language makes your case difficult.

What Happens If You’re Caught

SBA audits often begin the process. The SBA reviews your forgiveness application years later and finds discrepancies. They send an audit letter asking for additional documentation. How you respond determines whether the case stays civil or becomes criminal.

If you provide complete, truthful documentation showing minor errors and good faith, the SBA might reduce your forgiveness but not refer for prosecution. If you provide false documentation, inconsistent explanations, or refuse to cooperate, they’ll refer to the Inspector General for criminal investigation.

Criminal investigations mean FBI or SBA OIG agents. They’ll subpoena records, interview witnesses, analyze your bank accounts. They’re not looking for civil penalties – they’re building a criminal case. By the time they contact you, they already have significant evidence.

Federal charges typically include wire fraud – you submitted the forgiveness application electronically, which constitutes wire fraud if it contained false statements. Wire fraud carries up to 20 years per count. Prosecutors often charge multiple counts: the submission of the application, the electronic transmission to the SBA, the disbursement of forgiveness.

Additional charges stack on. False statements under 18 U.S.C. § 1014 for lying on a loan-related document – up to 30 years. Bank fraud under 18 U.S.C. § 1344 if the false statements defrauded the bank – up to 30 years. If others were involved, conspiracy charges add 5 years.

Sentencing depends on loss amount. The federal sentencing guidelines calculate loss as the amount of forgiveness you obtained through fraud. If you got $80,000 forgiven based on false payroll claims and should have only gotten $50,000 forgiven, the loss is $30,000. That drives your sentencing range.

Act Before Charges Are Filed

If you made false statements in your forgiveness application and haven’t been audited yet, you have options. Voluntary disclosure and repayment can prevent prosecution. Contact the SBA, explain the errors, return the improperly forgiven amount.

This doesn’t guarantee avoiding charges, but it dramatically reduces the likelihood. It shows good faith, lack of criminal intent, willingness to make things right. Prosecutors focus on defendants who fought them, lied repeatedly, refused to fix their fraud.

Don’t act without legal advice. Voluntary disclosure can be seen as admission of wrongdoing. A lawyer can help you determine whether disclosure makes sense for your situation and how to structure it to protect your rights.

If the SBA audits you, don’t respond without consulting a lawyer. The audit letter seems administrative, but your response can trigger criminal prosecution. False statements in your audit response are new crimes with new limitation periods.

If investigators contact you, don’t talk without a lawyer. They’ll say they want to “clear things up” or “get your side of the story.” They’re building a criminal case. Anything you say can be used against you. Lying to federal agents is a separate crime under 18 U.S.C. § 1001.

At Spodek Law Group, we defend PPP forgiveness fraud cases. Todd Spodek is a second-generation criminal defense lawyer with years of federal court experience. We’ve negotiated civil resolutions that avoided criminal charges, and we’ve successfully defended clients at trial.

Payroll fraud in forgiveness applications is serious – it’s often easier for prosecutors to prove than initial loan fraud because the evidence is clear in bank records. But these cases are defensible. Good faith mistakes happen, calculations are complex, guidance was confusing. If you’re accused of forgiveness fraud, call us. We’re available 24/7 and handle cases nationwide. Don’t wait until charges are filed – by then, your options are limited.