Authors: ANGELO SPINOLA, KURT ERSKINE, AND CLAYTON NEDZA
The myriad of rapid-fire legislative changes and emergency aid packages in response to the whirlwind caused by COVID has led to a complex labyrinth of compliance issues for home-based care providers. Now, in the aftermath of the pandemic, the federal government is vigorously investigating and prosecuting an unprecedented number of fraud claims related to the use of funds associated with these various aid packages, including the Paycheck Protection Program (“PPP”), COVID-19 Economic Injury Disaster Loan Program (“EIDL”), Provider Relief Funds Program (“PRF”) and the Employee Retention Credit Program (“ERC”). The recent decision to extend the statute of limitations to 10 years for the federal government to bring fraud claims associated with several of these programs is a clear indicator that we are only at the beginning of what will likely be a significant volume of government investigations aimed at those providers that leveraged COVID-related aid during the pandemic.
This article addresses the Biden administration’s action that extended the statute of limitations for investigating and prosecuting certain providers participating in these pandemic relief programs and the compliance steps your organization can take today to be adequately equipped for such an investigation in the future.
Recent Actions Extending the Statute of Limitations for Prosecuting Paycheck Protection and Economic Injury Disaster Loan Program Fraud Claims
In August 2022, President Biden signed two bills into law that give the Department of Justice and other federal agencies more time to investigate and prosecute Paycheck Protection Program and COVID-19 Economic Injury Disaster Loan cases. H.R. 7352, the “PPP and Bank Fraud Enforcement Harmonization Act of 2022” and H.R. 7334, the “COVID-19 EIDL Fraud Statute of Limitations Act of 2022” extend the statute of limitations for fraud charges involving PPP and EIDL fraud from five to ten years. Both bills passed with bipartisan support from Congress and clearly signal that pandemic relief fraud prosecutions and enforcement remain a top priority for the federal government.
In the last two years, as total funding for the relief pandemic programs climbed to over $800 billion, the government unsurprisingly began to see more significant numbers of pandemic relief fraud cases almost immediately. In its own analysis, the Small Business Administration’s OIG identified potential fraudulent loans totaling over $4.6 billion, and as of December 2021, the OIG’s PPP Fraud Hotline complaints exceeded 54,000. Some estimates put the amount of PPP and EIDL fraud at 10% of the total funds disbursed, and, as of March 2022, the Department of Justice reported it had charged over 1,000 individuals with criminal charges connected to alleged fraud of over $1 billion. It also noted that investigations of more than 1,800 individuals and entities were underway in connection with more than $6 billion in relief loans.
Most investigations have stemmed from the alleged fraudulent use of Paycheck Protection Program funds. In their loan applications, borrowers certified that they would use PPP funds only for authorized expenses such as payroll, mortgage or rent payments, utilities, and covered expenses (operations expenditures, property damage costs, supplier costs, or worker protection expenditures) as specified in the Paycheck Protection Program Rules. Deviating from these stated purposes may subject borrowers to both civil and criminal liability for fraud. While the PPP program rules are technical and have changed numerous times, the SBA maintains a website where borrowers can obtain information about appropriate uses of these funds.
To date, most of these investigations have been focused on the low-hanging fruit – situations where business owners’ use of PPP funds was clearly out of bounds (i.e., to purchase a Lamborghini or pay off student loans) or obvious fraud was alleged (i.e., applying on behalf of a fake business to obtain the loans). However, the government will continue to work its way through less egregious fact patterns and the increase in the statute of limitations from five to ten years provides ample time to do so.
The government is becoming more sophisticated in the techniques it uses to identify and target potential fraud. In a statement from Michael Horowitz, Chair of the Pandemic Response Accountability Committee (the “PRAC”) before the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis concerning “Examining Federal Efforts To Prevent, Detect, And Prosecute Pandemic Relief Fraud To Safeguard Funds For All Eligible Americans,” Mr. Horowitz testified that Inspector Generals investigating fraud generally rely on “information from whistleblowers and citizen watchdogs to help us prevent and detect wrongdoing, recover funds for the taxpayers, and hold wrongdoers accountable.” However, the PRAC is now using advanced data analytics to drive investigations and hold wrongdoers accountable. He explained that the PRAC is sharing Small Business Administration non-public loan level datasets with 37 Office of Inspector Generals and law enforcement agencies. The PRAC has also hired some of the “top data science talent from across the country” to facilitate and support their pandemic-related data analytics strategies. He explained that these data scientists have been instrumental in advancing PRAC’s efforts to identify improper payments and fraudulent activity in pandemic programs by developing robotic processes for automating some of the tasks associated with monitoring pandemic relief spending. Mr. Horowitz stated, “They identify flags and anomalies, sending those to our investigators for a closer look.” He further explained that prior to March 2020, the SBA OIG’s hotline typically received fewer than 1,000 complaints per year. That rate increased to 6,000 complaints per week during the early months of the pandemic.
Investigations in Other COVID-19 Relief Programs Increasing
Another aid package the government is zeroing in on is the employee retention credit program (“ERC”), also enacted by the CARES Act. The ERC is a fully refundable tax credit that can be as high as $33,000 per employee. Initially, the ERC was equal to 50% of up to $10,000 in wages paid to each employee before January 1, 2021. However, Congress has since extended and expanded the ERC through subsequent COVID-19 legislation. As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages paid to employees after December 31, 2020, through December 31, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $28,000 in 2021. Certain startup businesses forced to shut down due to a government order may be allowed a credit of up to $50,000 per quarter.
Generally, an employer is eligible for the ERC if it fully or partially suspended its operations due to a governmental order limiting commerce, travel, or group meetings due to COVID-19. Alternatively, an employer may qualify for the ERC in 2021 if it had gross receipts for any such quarter or the immediately preceding quarter that are less than 80% of its gross receipts for the same quarter in 2019. There is risk to an employer taking the ERC when it is not eligible for the credits, which would likely result in the underpayment of taxes, interest, and even penalties. The CARES Act provides that the Secretary of the Treasury shall waive any such penalty if the Secretary determines that such failure was due to the “reasonable anticipation” of the credit.
It is important to note that the American Rescue Plan Act of 2021 extended the IRS’s ability to make assessments regarding ERC credits from the normal three years to five years, signaling an IRS plan to aggressively investigate and prosecute providers who do not meet the qualifications of the ERC program Prosecutors are also increasingly targeting Provider Relief Fund (“PRF”) fraud cases. The PRF is part of the Coronavirus Aid, Relief, and
Economic Security (CARES) Act is a federal law enacted in March 2020 that provides financial assistance to medical providers to provide medical care to Americans suffering from COVID-19. The federal government disbursed PRF funds via both “General” and “Targeted” Distributions. To be eligible for General Distributions, a provider must have billed Medicare fee-for-service in 2019, be a known Medicaid and CHIP or dental provider and provide or provided after January 31, 2020, diagnoses, testing, or care for individuals with possible or actual cases of COVID-19.
The government is also likely leveraging the False Claims Act (FCA) as a vehicle to prosecute businesses for fraudulently using PRF funds. Using the FCA is an indication that the government is leveraging every tool in its arsenal to prosecute these claims. Given the time it takes for qui tam cases to arise, we anticipate a significant uptick in fraud cases against providers alleged to have inappropriately leveraged PRF funds. According to the Department of Justice, ten defendants have been charged with crimes related to misappropriating PRF monies intended for frontline medical providers, and three have pleaded guilty.
Action Plan for Home-Based Care Providers Who Have Utilized Aid
One need not be Nostradamus to see what happens next, the federal government will be investigating and prosecuting claims asserting the misuse of PPP, EIDL, Provider Relief and ERC program funds for years to come. Home-based care providers should ensure their house is in order by developing a comprehensive record of compliance now. Waiting for the government to come knocking and then attempting to recreate the operational assessment conducted by your organization to ensure all qualifications for these programs were met or to retrace how the funds were used is not a winning strategy. How likely is it that your compliance officer will be able to effectively navigate this in 10 years? How likely is it that your organization will even have the same compliance officer a decade from today? If there is a fly in the ointment, pluck it out now while memories are fresh and steps can be retraced. If you find a major qualification problem or misuse of funds, consider coming clean and reimbursing the government now to avoid the potential for additional penalties and sanctions later.
Specific action items to consider include a review of all documentation submitted to lenders related to program funds to ensure their accuracy. Ensure these records are appropriately stored and secured for the duration of the increased statute of limitations. These records include third-party communications with lawyers, consultants, and banks, financial documents, bank records, meeting minutes where the program application was discussed, and any analysis provided to ensure the qualification criteria were met.
If this analysis has not been conducted, engage a qualified expert to do such analysis now. For example, if your organization applied for and is or will be receiving credits under the ERC program, consult with a qualified tax attorney to ensure the organization took all appropriate steps in evaluating eligibility for the program. The CARES Act provides that the Secretary of the Treasury can waive liability for penalties associated with a business failing to qualify for the ERC program if the Secretary determines that the business had a good faith “reasonable anticipation” that it would qualify for the program. A qualified tax attorney can help establish a record of reasonable anticipation to avoid any potential penalties for failing to make timely tax deposits. For PPP, EIDL, and PRF participants, consult with qualified regulatory attorneys to evaluate your compliance records and assess the risk of any potential enforcement action. Finally, employers should conduct and preserve financial audit tracing to ensure the company used the funds appropriately. Clear documentation and a record establishing careful consideration of program eligibility and compliance will pay significant dividends if your organization is subject to a government investigation.
Questions about the Paycheck Protection or Economic Injury Disaster Loan Programs?
If you have any questions about the potential ramifications for your business related to its participation in any of these programs or need assistance assessing your compliance with the same, please reach out to us at firstname.lastname@example.org and we will connect you to the right professional to assist.
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