Common Mistakes in PPP Forgiveness Applications That Trigger Audits

Thanks for visiting Spodek Law Group – a second-generation criminal defense firm managed by Todd Spodek, with over 50 years of combined experience defending federal fraud cases throughout the country. PPP forgiveness applications are under intense scrutiny in 2025, and what many business owners dont realize is that even after receiving forgiveness, the SBA has a six-year audit window to challenge your loan and demand repayment – or worse, refer your case to the Department of Justice for criminal prosecution. The SBA expanded its audit activity dramatically this year, targeting both large loans over $2 million and smaller loans under $100,000 that were previously considered lower priority. What triggers these audits isnt always intentional fraud – honest mistakes, sloppy documentation, and misunderstanding complex SBA guidance account for many cases now facing clawback demands or criminal investigation. The problem is prosecutors dont distinguish between mistakes and fraud when building cases: if your forgiveness application contains material misstatements, you’re exposed to bank fraud charges carrying 30 years, wire fraud carrying 20 years, and False Claims Act penalties tripling your loan amount.

Documentation Gaps That Destroy Forgiveness

The most common mistake is incomplete or inconsistent documentation supporting your payroll costs. You claimed $200,000 in payroll expenses on your forgiveness application, but your payroll records dont match – maybe you included owner compensation exceeding the $20,833 cap per employee, or you counted contractors as employees when SBA rules prohibited that, or your quarterly 941 forms show different payroll numbers than what you reported. These discrepancies get flagged immediately when SBA cross-references your application against IRS data. We see cases where business owners genuinely believed they calculated payroll correctly, relied on accountants who misunderstood the rules, or made mathematical errors under time pressure when the forgiveness deadline approached. None of that matters to prosecutors. They look at the numbers, see the discrepancy, and charge bank fraud – arguing you knowingly made false statements to obtain loan forgiveness you werent entitled to.

The 60/40 Rule Violation

Another audit trigger: failing to spend at least 60% of PPP proceeds on payroll costs. SBA requires this ratio, and if your forgiveness application shows you spent 55% on payroll and 45% on rent, utilities, and other expenses, you’ve violated the terms – even if every expense was legitimate business spending. Many business owners assumed that as long as they used PPP money for authorized purposes, the exact ratio didnt matter. That assumption leads to clawback demands where SBA reduces your forgiveness amount proportionally, or criminal referrals if prosecutors believe you intentionally structured spending to maximize forgiveness while knowing you violated the 60% threshold.

Calculation Errors in Initial Applications

Mistakes on your original PPP application create problems during forgiveness review because SBA compares what you claimed initially against what you’re now documenting. You stated you had 15 employees when applying for the loan, but your forgiveness application only documents payroll for 12 employees – where did the other three go? You calculated average monthly payroll as $50,000 based on 2019 data, but your actual 2019 payroll records show $42,000 monthly – that $8,000 difference suggests you inflated numbers to get a larger loan. These discrepancies trigger immediate audits, and during those audits, SBA investigators look for evidence you deliberately misrepresented employee counts or payroll expenses to maximize your loan amount. They interview former employees, subpoena state unemployment records, and compare your application against tax filings looking for inconsistencies that suggest fraud rather than honest mistakes.

Owner Compensation Caps

Business owners routinely miscalculate how much of their own compensation qualifies for forgiveness. The cap is $20,833 per individual over the covered period – roughly $100,000 annualized. But many business owners included their full salary in payroll costs, or they counted owner health insurance and retirement contributions that exceeded the cap when combined with base compensation. We’ve defended cases where business owners had no idea these caps existed, where their accountants calculated owner compensation incorrectly, or where LLC members included guaranteed payments that SBA rules exclude from forgivable payroll costs. Prosecutors see these errors and immediately assume fraud because they think anyone applying for six-figure loans should understand the rules perfectly. That’s not reality – the program rolled out chaotically, guidance changed constantly, and small business owners made good-faith errors trying to navigate complex regulations while managing businesses during a pandemic.

Employee Retention Credit Conflicts

Claiming both PPP forgiveness and Employee Retention Credits for the same payroll creates huge problems. These programs have overlapping but not identical eligibility rules, and you cant use the same payroll expenses to justify both benefits. SBA now cross-references PPP forgiveness applications against ERC claims submitted to IRS, and when they find businesses that double-dipped – even inadvertently – they demand repayment of the PPP loan and refer cases to DOJ for False Claims Act prosecution. Business owners tell us they had no idea these programs conflicted, that their accountants advised them to claim both, or that they believed the programs served different purposes and therefore both claims were legitimate. Prosecutors dont care about that confusion – they argue the rules were clear, ignorance isnt a defense, and claiming both benefits proves fraudulent intent.

Timeline and Coverage Period Errors

Your covered period for forgiveness must align with SBA rules – either 8 weeks or 24 weeks from loan disbursement. Business owners make mistakes calculating which expenses fall within that window, sometimes including payroll from dates outside the covered period, or counting rent payments made before the period started, or documenting utilities paid after the period ended. These timeline errors reduce your eligible forgiveness amount, and if the errors are substantial, SBA treats them as evidence you didnt actually use PPP funds for authorized purposes during the covered period. We see cases where business owners genuinely confused the dates, where disbursement timing was unclear, or where they assumed “around that timeframe” was sufficient without tracking exact dates. SBA disagrees – they want precise documentation showing every dollar went to eligible expenses during the exact covered period, and deviations trigger audits that often lead to fraud allegations.

What Spodek Law Group Does

We defend PPP forgiveness audits and fraud cases from investigation through criminal trial. When SBA sends you a challenge letter demanding additional documentation or proposing to reduce your forgiveness, we respond with detailed financial analysis showing your calculations were reasonable, that any discrepancies resulted from good-faith errors rather than fraud, and that your loan use aligned with SBA requirements even if documentation was imperfect. We negotiate with SBA to resolve disputes without criminal referral – sometimes that means accepting partial repayment to avoid DOJ involvement, sometimes it means providing additional documentation that satisfies SBA’s concerns, sometimes it means demonstrating that SBA’s interpretation of ambiguous rules is incorrect and your forgiveness should stand. When cases move to criminal investigation, we challenge the government’s fraud theory by showing lack of intent – you relied on professional advice, you made understandable mistakes under difficult circumstances, ambiguous SBA guidance made compliance genuinely unclear, or calculation errors were minor and didnt affect your overall eligibility. We retain forensic accountants who reconstruct your finances showing legitimate business operations and good-faith efforts to comply with program rules. At Spodek Law Group, we’ve defended federal fraud cases involving government programs for decades. You can reach us 24/7 – because when SBA challenges your forgiveness or refers your case to DOJ, responding quickly and strategically can mean the difference between resolving the issue administratively and facing decades in federal prison.