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Client Alert: Nonprofits in the Crosshairs: DOJ Targets PPP Loans Under the Civil False Claims Act

What a nonprofit should do after receiving a DOJ letter, civil investigative demand, or SBA inquiry questioning its PPP eligibility and forgiveness

THE HIGHLIGHTS FOR NONPROFITS RECEIVING DOJ LETTERS

 

• On May 27, 2026, the U.S. Attorney's Office for the District of Columbia announced civil False Claims Act settlements with two nonprofits over PPP loans they were not eligible to receive, totaling more than $450,000.
• The Department of Justice (DOJ)'s new National Fraud Enforcement Division, announced April 7, 2026, signals that pandemic-relief recoveries against nonprofits are accelerating, not winding down.
• A nonprofit that received a DOJ letter, a civil investigative demand or an SBA inquiry about PPP eligibility faces civil exposure of up to treble damages plus a per-claim penalty.

 

The DOJ is sending PPP eligibility letters to nonprofits

A growing number of nonprofit organizations are opening the mail to find a letter from the federal government questioning a PPP loan they received years ago. U.S. Attorney's Offices, working with the Small Business Administration, are contacting nonprofits to ask whether they were actually eligible for the loans they received, or for the forgiveness they obtained. If your organization has received one of these letters, you are not alone, and the situation is serious enough to warrant careful handling from the first day.

Many of these DOJ letters open with a subject line that reads “RE: Paycheck Protection Program Loan #” followed by the loan number, and they reference a “possible violation of the False Claims Act, 31 U.S.C. §§ 3729-33.” The body typically alleges that the organization “submitted false claims or certifications to the Small Business Administration (SBA)” or “received funding when it was not eligible.” If your letter uses this language, it is a False Claims Act inquiry, and it should be treated as one.

These letters arrive in several forms. Some are informal notices or requests for information; others are civil investigative demands, which are formal pre-suit tools that compel documents and testimony. Whatever the format, the letter usually signals that the organization is under review for potential civil liability under the False Claims Act. Receiving one does not mean the organization set out to do anything wrong. Eligibility rules shifted repeatedly during 2020 and 2021, and many certifications made in good faith are now being second-guessed with the benefit of hindsight.

If your nonprofit receives such a letter, the most important first step is to pause. What you say, and what you do not say, at this early stage shapes everything that follows. Consulting an experienced tax controversy attorney alongside your accountant can help you first assess the exposure, preserve the organization's defenses, and manage communications with the government.
 

The enforcement action that should have every nonprofit's attention

On May 27, 2026, the U.S. Attorney's Office for the District of Columbia announced that it had resolved False Claims Act allegations against two nonprofit organizations that obtained loans under the Paycheck Protection Program (PPP) for which they were not eligible. Neither matter was criminal; both were civil settlements. The DOJ’s press release on these False Claims Act issues signals how the government views nonprofit PPP borrowing and fraud claims.

One of the nonprofit organizations cited in the release is The Center for International Policy, a Section 501(c)(3) research and advocacy organization. The nonprofit organization applied for and received full forgiveness of a $192,447 second-draw loan in early 2021. Congress had prohibited second-draw loans to entities primarily engaged in political or lobbying activities, including organizations formed for research, public policy advocacy or political strategy, and entities that publicly describe themselves as think tanks. The Center agreed to pay $243,571.25 plus interest, an amount set after the government analyzed its ability to pay.

These types of recent cases illustrate a single point from two directions: nonprofit eligibility for PPP turned on organizational type, size and the share of activity devoted to lobbying or political work, and the government is now starting to aggressively recover funds where a certification did not match those rules.
 

Why nonprofits are now a priority

These settlements did not happen in isolation. On April 7, 2026, the DOJ announced the creation of a National Fraud Enforcement Division whose stated mission is to investigate and prosecute the theft and fraudulent misuse of taxpayer dollars. That effort supports a whole-of-government Task Force to Eliminate Fraud, and the Department continues to solicit tips through the National Center for Disaster Fraud Hotline.

Several features of this environment matter for nonprofits specifically. The False Claims Act rewards whistleblowers, so insiders such as former employees, board members or grantees can trigger an inquiry. Investigators increasingly match SBA loan data against tax filings and lobbying disclosures, which makes eligibility mismatches easier to find years after the fact. And because most nonprofit PPP exposure is civil rather than criminal, the government can pursue recoveries on a lower burden of proof and without the intent showing a criminal case would require.

The eligibility rules that trip up nonprofits

Eligibility depended heavily on a nonprofit's tax classification. In broad terms:

• 501(c)(3) organizations were eligible for first-draw loans. Second-draw loans, however, were off limits to entities primarily engaged in lobbying, political or think-tank activity, which is the rule at issue in the Center for International Policy settlement.
• 501(c)(4) organizations were never eligible for PPP loans, first draw or second. Congress left (c)(4) out of every later expansion, which is the rule at issue for the other type of nonprofit organization cited in the DOJ’s recent press release.
• 501(c)(6) organizations (trade associations, chambers of commerce, business leagues) were not eligible under the original CARES Act, but were made eligible by the December 2020 Economic Aid Act if they met four limits: no more than 300 employees; no more than 15 percent of receipts from lobbying; lobbying no more than 15 percent of total activities; and lobbying costs under $1 million in the last tax year ending before February 15, 2020.
• Other 501(c) types, such as 501(c)(7) social clubs, were also brought in by the Economic Aid Act as "additional covered nonprofit entities," subject to the same size and lobbying limits. Only 501(c)(4) was excluded from the expansion altogether.

A certification that did not match these rules can support civil liability even when it was made in good faith, in reliance on a lender or an outside advisor. That is what makes the current wave of inquiries so broad: many organizations certified eligibility using rules that were changing in real time during 2020 and 2021.

What a False Claims Act investigation actually involves

The civil False Claims Act (31 U.S.C. §§ 3729-3733) imposes liability on anyone who knowingly submits, or causes the submission of, a false claim for federal funds. "Knowingly" is broad: it reaches actual knowledge, deliberate ignorance and reckless disregard of the truth. Specific intent to defraud is not required. For PPP purposes, both the loan application and the forgiveness application can be treated as claims.

A nonprofit typically learns of an investigation in one of three ways: a letter from a U.S. Attorney's Office, a civil investigative demand (a pre-suit administrative subpoena for documents and testimony) or an inquiry from the SBA Office of Inspector General. Some civil matters run in parallel with a criminal review, which raises the stakes for how the organization responds at the outset.

The remedies are significant. A defendant found liable can owe up to three times the government's damages plus a separate civil penalty for each false claim; that per-claim penalty is adjusted for inflation and currently runs from $14,308 to $28,619 for penalties assessed after July 3, 2025. Because forgiveness of an ineligible loan can also unwind the tax treatment of that loan, some organizations face a tax exposure layered on top of the repayment. Those points are developed in our companion analysis of PPP loan fraud and ERC enforcement defense.

If your nonprofit received a notice: first moves

1. Do not ignore it. A civil investigative demand carries deadlines, and letting them pass forfeits leverage and can escalate the matter.
    
2. Do not return the money unilaterally. Repaying or self-correcting before you understand the exposure can be read as an admission and may not resolve False Claims Act liability on its own.
    
3. Preserve records. Put a litigation hold on the loan application, the forgiveness application, board minutes, lender communications and payroll and lobbying records.
    
4. Reconstruct the eligibility analysis. Identify which rule the government believes was violated, and whether a defense applies: good-faith reliance, the actual share of lobbying activity, materiality or a safe harbor.
    
5. Involve counsel before responding. The pre-suit stage is where scope is negotiated and where many matters resolve on favorable terms; statements made early shape everything that follows.

How Whiteford can help

Whiteford's tax controversy and white-collar attorneys represent organizations, including nonprofits, in SBA, IRS and DOJ matters, from responding to a civil investigative demand through the resolution of a False Claims Act inquiry. If your organization has received a letter or demand questioning its PPP eligibility or forgiveness, contact us to discuss your options.
 

Can a nonprofit face False Claims Act liability for a PPP loan?

Yes. The civil False Claims Act applies to any recipient of federal funds, including nonprofits. Recent settlements resolved allegations that 501(c)(3) and 501(c)(4) organizations obtained PPP loans or forgiveness for which they were not eligible.
 

Were nonprofits eligible for PPP loans?

It depended on the tax classification. 501(c)(3) and 501(c)(19) organizations were eligible for first-draw loans, with limits on second-draw loans for lobbying-focused entities. 501(c)(6) organizations, and other types such as 501(c)(7), became eligible only after the December 2020 Economic Aid Act, and only within limits on size and lobbying activity. 501(c)(4) organizations were never eligible.

How long does the government have to bring a False Claims Act case?

The False Claims Act generally allows six years from the violation, or three years from when the responsible federal official knew or should have known the facts, whichever is later, but never more than ten years from the violation. The exact deadline is fact-specific and should be confirmed with counsel.

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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.