Client Alert: Heightened Enforcement Risk for Ineligible Recipients of Paycheck Protection Program Loans
Date: May 19, 2025
By:
Michael March
Below is a summary of the statutory framework, the categories of borrowers that were excluded from PPP participation during most of the program’s life, and the civil and criminal liabilities that can flow from an ineligible loan application. We also provide practical steps for organizations to mitigate risk and respond to government inquiries.
1. The CARES Act and the Paycheck Protection Program
Enacted on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) created the PPP to inject liquidity into the small-business sector during the COVID-19 public health emergency. The PPP was designed as a lifeline for businesses facing unprecedented economic disruption, with the goal of preserving jobs and supporting payroll. The program authorized private lenders to make SBA-guaranteed loans that could be forgiven—i.e., converted to grants—if the borrower used proceeds for payroll, rent, utilities, and certain other enumerated expenses and then properly documented that use. The initial rollout of the PPP was rapid, and guidance from the SBA evolved over time, leading to confusion among applicants about eligibility and documentation requirements.
Congress later amended the program through, among other measures, the Paycheck Protection Program Flexibility Act of 2020 and the American Rescue Plan Act of 2021, ultimately appropriating more than $800 billion for two discrete tranches of loans:
• First-Draw Loans: for borrowers who had not previously received PPP funds. These loans were intended to provide immediate relief to businesses and nonprofits that were struggling to meet payroll and other essential expenses.
• Second-Draw Loans: for borrowers who had fully spent a First-Draw loan and satisfied additional revenue-reduction requirements, including demonstrating at least a 25% reduction in gross receipts in any quarter of 2020 compared to 2019.
• Second-Draw Loans: for borrowers who had fully spent a First-Draw loan and satisfied additional revenue-reduction requirements, including demonstrating at least a 25% reduction in gross receipts in any quarter of 2020 compared to 2019.
The PPP was administered by the SBA in partnership with private lenders, and the application process required borrowers to make a series of certifications regarding their eligibility, the necessity of the loan, and the intended use of proceeds. The speed and scale of the program, while necessary to address the economic crisis, also created opportunities for error and, in some cases, abuse.
2. Eligibility and Exclusions
For most small businesses and Internal Revenue Code § 501(c)(3) charities, eligibility turned on head-count thresholds (generally 500 or fewer employees) and good-faith certifications that “current economic uncertainty makes this loan request necessary” and that the borrower would use funds for permissible purposes. The SBA also required that applicants not be engaged in certain prohibited activities and not be otherwise ineligible under existing SBA rules.
However, Congress initially excluded several categories of tax-exempt organizations from PPP eligibility. The rationale was to focus relief on entities most directly affected by the pandemic and to avoid subsidizing organizations engaged in significant lobbying or political activity. Over time, Congress responded to advocacy from the nonprofit sector and expanded eligibility, but only after the program had been in operation for several months.
• 501(c)(6) trade associations and chambers of commerce remained ineligible until December 27, 2020, when the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted as part of the Consolidated Appropriations Act, 2021, granted them eligibility. This change allowed many professional societies, business leagues, and local chambers to apply for PPP funds, provided they met additional restrictions on lobbying activities and employee headcount.
• 501(c)(5) labor organizations, 501(c)(7) social clubs, 501(c)(8) fraternal societies, and 501(c)(9) voluntary employee beneficiary associations did not become eligible until March 11, 2021, when the American Rescue Plan Act of 2021 was enacted. These newly eligible entities were required to have 300 or fewer employees and could not receive more than 15% of their receipts from lobbying activities.
• 501(c)(5) labor organizations, 501(c)(7) social clubs, 501(c)(8) fraternal societies, and 501(c)(9) voluntary employee beneficiary associations did not become eligible until March 11, 2021, when the American Rescue Plan Act of 2021 was enacted. These newly eligible entities were required to have 300 or fewer employees and could not receive more than 15% of their receipts from lobbying activities.
Other entities, including 501(c)(4) social welfare organizations and 527 political organizations, were never rendered eligible, regardless of size or purpose.
If any of the above organizations obtained a PPP loan before the dates on which Congress extended eligibility—or obtained a Second-Draw loan premised on a tainted First-Draw loan—the United States considers the entire transaction voidable and the government’s forgiveness of that loan a false claim on the Treasury.
3. False Claims Act Liability
The FCA, 31 U.S.C. §§ 3729–3733, imposes civil liability on anyone who knowingly (defined to include “reckless disregard”) submits or causes the submission of a false or fraudulent claim for payment to the United States or makes a material false statement in order to obtain such payment. Each PPP application and each forgiveness application constitutes a “claim.” Because PPP borrowers were required to certify eligibility and necessity, any material inaccuracy transforms the application into a false claim. The government has made clear that certifications regarding eligibility are material to its decision to approve and forgive PPP loans.
• Statutory damages equal to three times the loss sustained by the government—measured by the loan principal, any accrued interest forgiven, the processing fees the SBA remitted to the lender, and consequential damages such as investigative costs;
• A civil penalty currently ranging from roughly $13,946 to $27,894 per false claim, adjusted annually for inflation. Each separate application or certification can be treated as a distinct claim, multiplying potential exposure.
• A civil penalty currently ranging from roughly $13,946 to $27,894 per false claim, adjusted annually for inflation. Each separate application or certification can be treated as a distinct claim, multiplying potential exposure.
The statute empowers any citizen to file qui tam suits on the government’s behalf. If the DOJ intervenes and recovers funds, the whistleblower can receive up to 25 percent of the government’s recovery; if the DOJ declines to intervene, the share may reach 30 percent. These generous bounties incentivize current and former employees, competitors, and other stakeholders to report perceived non-compliance. The government’s burden of proof is lower in civil cases than in criminal prosecutions, making FCA enforcement a powerful tool for recovering misallocated funds.
4. Wire- and Mail-Fraud Exposure
FCA liability is civil, but the factual predicate—fraudulent statements to obtain government money—can also map onto criminal statutes. In addition to the FCA, the following statutes are commonly invoked; however, most often they are predicated on the entity submitting fraudulent documentation. Specifically, fabricated forms W2, 941, and 1120 can lead to a criminal investigation rather than a civil inquiry.
• Wire Fraud, 18 U.S.C. § 1343: prohibits any scheme to defraud that uses “wire, radio, or television communication in interstate or foreign commerce.” Submitting an electronic PPP application through the lender’s online portal or transmitting supporting documents via email satisfies the jurisdictional “wire” element. A conviction carries up to 20 years imprisonment and substantial fines; the maximum climbs to 30 years if the fraud relates to benefits authorized “in connection with a presidentially declared major disaster or emergency,” a category that includes the CARES Act. The DOJ has already secured several convictions and guilty pleas in PPP fraud cases involving wire fraud charges.
• Mail Fraud, 18 U.S.C. § 1341: criminalizes similar schemes executed through the postal service or any other interstate carrier. Any hard-copy transmission of PPP documentation—e.g., mailing a signed note or forgiveness packet—can supply the mailing element. Penalties mirror those for wire fraud.
• Mail Fraud, 18 U.S.C. § 1341: criminalizes similar schemes executed through the postal service or any other interstate carrier. Any hard-copy transmission of PPP documentation—e.g., mailing a signed note or forgiveness packet—can supply the mailing element. Penalties mirror those for wire fraud.
Because the DOJ routinely “stacks” counts, a single loan obtained through multiple transmissions can generate multiple felony charges, exponentially increasing sentencing exposure. Organizations and individuals found guilty of criminal fraud face not only incarceration and fines, but also reputational harm, debarment from federal programs, and loss of tax-exempt status.
5. Practical Takeaways
- Audit Eligibility: Non-profit organizations, especially 501(c)(5), (6), (7), (8), and (9) entities, should confirm that they applied for PPP funds only after Congress conferred eligibility and that any Second-Draw loans rested on a valid First-Draw foundation. Organizations should review the dates of their loan applications and compare them to the statutory eligibility dates. If there is any uncertainty, consult with legal counsel or a qualified advisor.
- Verify Certifications: Management should locate and review the SBA Form 2483 (or 2483-SD), the note, and the forgiveness application to ensure that each certification regarding size, necessity, and use of proceeds was accurate when made and remains defensible today. Documentation should be organized and readily accessible in the event of an audit or investigation. Consider conducting a mock audit to identify potential weaknesses.
- Prepare for Inquiry: If the government or a lender requests additional information, respond promptly but judiciously; incomplete or inaccurate responses can compound liability. Designate a point person or team to handle inquiries, and ensure that all communications are coordinated and reviewed by counsel. Maintain a record of all correspondence with government agencies and lenders.
- Consider Voluntary Disclosure: Where errors exist, a timely, well-structured disclosure can mitigate or even eliminate FCA penalties and foreclose criminal referrals. The DOJ and SBA have established protocols for voluntary disclosures, and organizations that self-report may be eligible for reduced penalties or other favorable treatment. Consult with experienced counsel before making any disclosure.
- Monitor Developments: Stay informed about changes in enforcement priorities, new case law, and government guidance related to PPP loans. The legal landscape is evolving, and proactive compliance can help organizations avoid costly mistakes.
- Train Staff: Ensure that employees involved in financial reporting, grant management, and compliance are trained on PPP requirements and the risks associated with false certifications. Regular training can help prevent inadvertent errors and foster a culture of compliance.
In sum, when the DOJ turns its considerable investigative resources toward alleged PPP improprieties, retaining an experienced tax attorney is not merely advantageous; it is often the decisive factor between a swiftly contained inquiry and a protracted ordeal with crushing financial and reputational consequences. A seasoned tax lawyer brings to bear a sophisticated grasp of the CARES Act, SBA interim final rules, and evolving DOJ enforcement priorities, while simultaneously invoking attorney–client privilege to create a protected environment for candid internal fact-gathering and strategic planning.
By conducting meticulous forensic reviews of loan applications, forgiveness documentation, and related tax filings, counsel can identify vulnerabilities early, craft cogent legal and factual defenses, negotiate voluntary disclosures or settlements that minimize exposure, and, when necessary, mount a vigorous courtroom defense grounded in statutory interpretation and procedural safeguards. Moreover, the attorney acts as a strategic liaison with federal prosecutors and investigative agents, tempering the tone of compulsory process, narrowing subpoenas, and framing narratives that highlight the borrower’s good-faith reliance on evolving government guidance. In a landscape where enforcement thresholds are fluid and penalties can range from treble damages under the False Claims Act to the criminal indictment, the proactive engagement of a knowledgeable tax attorney transforms uncertainty into a managed, defensible posture, preserving both the enterprise’s viability and the principals’ peace of mind.
Please reach out to Whiteford’s Tax and Private Wealth Law attorneys with any questions.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.