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It’s a snowy Friday here in the DC area, and I’m going live on Substack this afternoon to talk about the 8(a) audit letters that went out to all SBA 8(a) participants today. (Credit to Piliero Mazza for posting excerpts of the letter on its website.)
It’s December 5th, and the audit letter asked for a response with CSV and PDF files within 30 days. So we’re talking about January 5th, 2026. Merry Christmas and Happy Holidays from SBA to the 8(a) participants. I did hear from one graduated firm that said that they received a letter as well. So it’s not just current 8(a) firms, but potentially graduated firms.
This letter follows up on an announcement that SBA made back in June that it was going to conduct a full-scale audit of the 8(a) program after the Department of Justice uncovered a bribery scheme that involved the USAID (U.S. Agency for International Development). The announcement about the full-scale audit said that SBA would go back over 15 years to look at the 8(a) program.
Fortunately, the letters that went out to 8(a) firms did not ask for 15 years of information. For the most part, they’re asking for the last three fiscal years of information. That would have been a lot for SBA to go through; there are over 15,400 8(a) participants. Even with three years’ worth of data, there are 13 points in the letter that SBA is asking for. It’s going to be a considerable amount of documentation that SBA receives from 8(a) firms, potentially as early as January 5th.
It’s not clear whether SBA will entertain requests for extensions from that. It’s obviously a busy time of the year, not just the holidays, but the end of the calendar year as well. So it’s going to be quite a challenge for the firms that receive this request from SBA to put all of this information together.
I’m coming online to talk about five areas that I think SBA is going to look into when it receives this documentation.
Audit Focus Areas
The five areas are:
Limitations on Subcontracting
Compliance with the Mentor-Protégé Program
Excessive Withdrawals
Benefits Reporting for entity-owned firms
Indications of Bribery or Kickbacks
I’ll go through each of those one by one.
1. Limitations on Subcontracting
First, the limitations on subcontracting. This is an issue that I went into with the ATI Government Solutions video. That’s really the video, the circumstances, that has pushed SBA to send out this letter.
As a recap, there was a YouTube video from James O’Keefe that involved an 8(a) contractor, an entity-owned contractor named ATI Government Solutions. In the video, the employees of ATI Government Solutions stated and alleged that there were potential pass-throughs that could have happened , that up to as little as 20% of the work on 8(a) contracts allegedly was being performed by ATI Government Solutions.
The reason 20% is a concern is that’s lower than the limitations on subcontracting for most contracts. The limitations on subcontracting rule requires that on 8(a) contracts, the company that receives the contract perform at least, for most contracts, 50% of the work by its own employees or with similarly situated entities. For an 8(a) contract, a similarly situated entity is another 8(a) firm.
That rule is a different percentage for construction contracts. For general construction contracts, it’s 15%. For specialty trade construction, it’s 25%. So you could go lower than 20% on a general construction contract. And also, it counts similarly situated entities as similar to the prime contractor performance. In the example of ATI Government Solutions, if ATI Government Solutions was subcontracting some of its work to other 8(a) firms (which might include individual-owned 8(a) firms), then that work done by the other 8(a) firms would count toward that 50% limit.
How do you find out which percentage applies to your contract? It depends on the NAICS code. You have to look at the NAICS code of the contract. That’s why SBA is asking for a copy of the 8(a) contracts as well as the subcontracts. They want to see the NAICS code to see which of the limitations on subcontracting percentage counts for that contract.
One area that was interesting that SBA asked for was lists of employees. Part of the reason that SBA is probably asking for a list of employees is that it’s looking at whether you might be counting independent contractors toward your performance. Independent contractors, under the limitations on subcontracting, do not count as your employees. They are counted as subcontractors for the purposes of limitations on subcontracting.
In some of the other programs, like women-owned, service-disabled veteran-owned, those independent contractors might count as similarly situated identities. That’s not going to be the case in the 8(a) program because you’re not going to have an independent contractor, usually a 1099, that’s going to be certified into the 8(a) program. So if you have a 1099, that 1099 counts as a subcontractor, not an employee, per SBA regulations, 125.6.
The point of the request for, say, the general ledger, the copies of the contracts and subcontracts, and the employee list, a lot of that is going toward looking at the limitations on subcontracting and particularly looking at whether the 8(a) firm might have been used as a pass-through, similar to the concerns that are coming out of that YouTube video. SBA is looking at whether this 8(a) firm is being used as a front for a subcontractor, maybe even a large business, in order to get access to sole source contracts.
So that’s number one, the limitations on subcontracting. That’s probably the number one thing that SBA is looking for, and a lot of that concern is because of the videos on ATI Government Solutions.
2. Mentor-Protégé Program Compliance
The second area that SBA is probably looking into is the Mentor-Protégé Program. The Mentor-Protégé Program allows a small business, in this case an 8(a) firm, to partner with a mentor, which can be a large business. The performance of that large business mentor counts as a small business contract performance. That large business mentor gains access to small business contracts and even 8(a) contracts through the Mentor-Protégé Program.
But there’s an important compliance requirement in the Mentor-Protégé Program: it’s the 40% rule. The 40% rule says that 40% of the aggregate work of the mentor and protégé together must be performed by the protégé. So you take all the work done by the mentor and all the work done by the protégé, add that together, and 40% of that work must be done by the protégé. There’s additionally a requirement that the protégé’s work not just be ministerial or administrative.
SBA is asking for general ledgers, trial balances, and copies of subcontracts. It seems like part of that would allow SBA to calculate for 8(a) firms that are protégés whether that mentor-protégé relationship is complying with the 40% rule. The 40% rule is a rule that considers whether work is being done by that entity or by its employees. Here again, if you have 1099s, those are going to be considered subcontractors, which will be outside of the work being done by the mentor-protégé, not work being done by the protégé toward that 40% rule.
Another thing to think about on the 40% rule is whether the mentor has affiliates. The mentor’s share, when you’re aggregating the mentor and protégé work together, includes any affiliates of the mentor. So oftentimes, if you’re working with a large business, they’re going to have different divisions, different subsidiaries. If those subsidiaries and divisions are affiliated with the mentor, then that counts toward the maximum 60% that the mentor would be able to do in a mentor-protégé relationship.
I’ll just note also, though, going back to the ATI solution, that this 40% is on top of the 50% limitation on subcontracting that goes into services. So, in a services contract, if there’s a mentor-protégé joint venture (in the 8(a) program or not, but let’s say it’s an 8(a) joint venture that wins that contract), the 8(a) firm can actually do as little as 20% of that contract. So when you heard in the ATI Government Solutions videos that ATI was doing 20%, that can be completely legal and compliant with SBA’s rules through a mentor-protégé relationship.
The reason is that the joint venture itself can do as little as 50% of the contract under the limitation on subcontracting. They can subcontract out 50%. And then the protégé in that joint venture can do as little as 40% of that 50%. When you combine those two percentages, you just multiply them, and you get 20%. So it’s possible on a services contract, which still has a 50% limitation on subcontracting, that the 8(a) firm, in a mentor-protégé joint venture, can do as little as 20% of the contract.
SBA is looking for the documentation that would show in some of those admittedly surprising cases whether it might actually comply with SBA’s regulations. That’s why they’re asking for the copies of the subcontracts, general ledger, and employee lists.
3. Excessive Withdrawals
Number one and number two were limitations of subcontracting and the Mentor-Protégé Program. Number three is about excessive withdrawals.
Every 8(a) firm is subject to a limit on excessive withdrawals. This is in 13 CFR 124.112(d), and it gives a chart as to what is considered to be excessive withdrawals:
(i) $250,000 for firms with sales up to $1,000,000;
(ii) $300,000 for firms with sales between $1,000,000 and $2,000,000; and
(iii) $400,000 for firms with sales exceeding $2,000,000.
Excessive withdrawal could be anything from a cash dividend, distribution in excess of what’s needed to pay S-Corp or partnership taxes, cash and property withdrawals, payments to immediate family members that aren’t employed by the company, bonuses, and investments on behalf of the owner.
If the SBA finds that funds or assets have been excessively withdrawn, and the withdrawal was detrimental to the achievement of the target’s objectives and goals in the participant’s business plan, SBA may initiate termination, early graduation, or require a reinvestment of funds or other assets. SBA can probably look at your general ledger, which is being asked in this 13-point item, to see whether there were withdrawals that went to the owners that would be deemed excessive per that schedule.
4. Benefits Reporting for Entity-Owned Firms
The fourth area that this audit request seems to be getting at is benefits reporting for entity-owned firms. That’s for 124.604, and that’s specifically for firms that are owned by Alaska Native corporations, Native Hawaiian organizations, and Indian tribes.
There is a case out there involving a Native Hawaiian firm where it’s suspected that some of the owners are taking excessive amounts from the firm that should have been going to benefits for the Native organization, the Hawaiian community, or the Alaska Native community or the tribal community. Firms report on their benefits to their community on an annual basis to SBA. Using some of the material that SBA is collecting from entity-owned firms, SBA could look further at whether those benefits are actually being distributed to the communities or perhaps whether they’re being diverted for the use of individuals or officers of the firm.
5. Bribery or Kickbacks
Finally, number five is looking at whether the documents show bribery or kickbacks.
The USAID situation that led to the program audit involved a bribery scheme. The Department of Justice disclosed a scheme and came into a settlement agreement with a number of companies where a contracting officer, a USAID contracting officer, pleaded guilty to bribery. The press release from the Department of Justice stated that the USAID contracting officer was listed as an employee of the 8(a) firm. It said the “bribes were often concealed through electronic bank transfers falsely listing Watson on payroll.” Watson was the USAID contracting officer.
It could be the case that, through the review of employee lists and payments, that there may be uncovering of or a thought to try to uncover additional schemes similar to this.
There’s also a law about subcontractor kickbacks: the Anti-Kickback Act. The law says that it’s illegal for subcontractors to provide payments in the form of kickbacks to prime contractors in order to receive subcontracts. That may be another area that SBA is looking through, and you’d be able to find that through some of these documents that are being submitted to SBA.
Wrapping up
The big concern I think now for 8(a) firms is just getting these documents together. But additionally, you really do have to be thinking about what is SBA going to be reviewing in these documents? What sort of areas is it looking to?
If you’re not able to comply with some of these requirements, like limitations on subcontracting or the 40% rule, SBA has stated that it could result in the firm not being eligible for continued participation or additional remedial action. And then if it rises to the level of that USAID scheme, it could be that SBA gets the Department of Justice involved in a criminal or civil capacity, too.
Happy holidays to everybody. Best of luck in responding to this SBA inquiry.
With 20 years of Federal legal experience, Sam Le counsels small businesses through government contracting matters, including bid protests, contract compliance, small business certifications, and procurement disputes. Sam obtained his law degree from the University of Virginia and formerly served as SBA’s director of procurement policy. His website is www.samlelaw.com.
This video is for informational purposes only and does not constitute legal advice.
