ERC Fraud Penalties and Federal Sentencing: What You Need To Know

ERC Fraud Penalties and Federal Sentencing: What You Need To Know

The average federal prison sentence for Employee Retention Credit fraud is around 21 months. That number sounds almost manageable until you understand what it actually means. Some defendants are getting 52 months. Others are getting over 10 years. The range between the shortest and longest sentences is enormous, and the factors that determine where you fall on that spectrum are things most people dont understand until theyre sitting in a courtroom.

If youre facing potential ERC fraud charges, the penalties you could receive depend on how much you claimed, how you claimed it, whether you cooperated, your criminal history, and which specific statutes prosecutors decide to charge you under. The same underlying conduct can result in dramatically different sentences depending on these factors. Understanding how federal sentencing actually works is critical to evaluating your situation and making informed decisions about how to proceed.

This is not academic information. The IRS has initiated over 545 investigations involving more than $5.6 billion in suspected ERC fraud. Of those, 75 have resulted in federal charges and 38 defendants have already been convicted. More charges are coming. More convictions are coming. If your ERC claim was improper, understanding what penalties you might face is the first step toward protecting yourself.

How Federal Sentencing Actually Works

Federal sentences are not arbitrary. They follow a structured system called the Federal Sentencing Guidelines. These guidelines create a matrix based on two factors. The first factor is your offense level, which is determined by the seriousness of what you did. The second factor is your criminal history category, which is determined by your prior convictions.

The intersection of your offense level and criminal history category produces a sentencing range. For example, an offense level of 20 and a criminal history category of one produces a guideline range of 33 to 41 months. The same offense level with a criminal history category of three produces a range of 41 to 51 months. Higher offense levels and higher criminal history categories mean longer sentences.

Judges have discretion to sentence above or below the guideline range, but they must explain there reasoning. Most sentences fall within or close to the guidelines. Understanding where you fall in this matrix is essential to predicting what kind of sentence youre likely facing.

For tax crimes specifically, the offense level is driven primarily by the tax loss. The larger the tax loss, the higher your offense level, and the longer your potential sentence. This is why the size of your ERC claim matters so much. A $50,000 fraudulent claim produces a completly different sentencing calculation than a $500,000 claim.

The Tax Loss Calculation

In ERC fraud cases, your tax loss is calculated as 100% of any false credits you claimed. This is a direct number. If you claimed $200,000 in ERC that you werent entitled to, your tax loss is $200,000. If you claimed $1 million, your tax loss is $1 million. There is no discount for the amount you might have legitimately qualified for or the taxes you paid in other years.

The tax loss drives your base offense level through a table in the sentencing guidelines:

• Tax loss between $40,000 and $70,000 produces a base offense level of 14
• Tax loss between $250,000 and $550,000 produces a base offense level of 18
• Tax loss between $1.5 million and $3.5 million produces a base offense level of 24

Each jump in tax loss pushes your offense level higher and your sentencing range longer.

For someone with no criminal history, the difference between a tax loss of $100,000 and a tax loss of $500,000 could be the difference between 15 months and 30 months. At larger amounts, the differences become even more dramatic. This is why defendants who claimed large ERC amounts face significantly more prison time than those who claimed smaller amounts.

The government will calculate your tax loss based on the evidence they have. If you claimed credits for multiple quarters, they will add all the fraudulent amounts together. If you claimed credits for multiple businesses, all of those amounts get combined. The total tax loss is what drives your sentence.

When Tax Fraud Becomes Wire Fraud

Tax fraud under 26 USC 7201 carries a maximum sentence of five years per count. That sounds like the ceiling for ERC cases. Its not. Federal prosecutors routinely add wire fraud charges to tax fraud cases, and wire fraud changes everything.

Wire fraud under 18 USC 1343 carries a maximum sentence of 20 years per count. The statute applies whenever someone uses electronic communications in connection with a scheme to defraud. Since ERC claims were filed electronically through the IRS systems, prosecutors can characterize the same conduct as wire fraud instead of or in addition to tax fraud.

This is not theoretical. In the largest ERC fraud case charged so far, defendants face wire fraud charges carrying up to 20 years, conspiracy charges carrying up to 5 years, and false return charges carrying up to 3 years. The statutory maximum exposure in that case is enormous because prosecutors stacked multiple charges arising from the same underlying conduct.

The decision of which statutes to charge under is largely within prosecutorial discretion. A straightforward ERC case that could be charged as tax fraud with a 5 year maximum can instead be charged as wire fraud with a 20 year maximum. Or both. The charging decision dramatically affects your potential sentence and your leverage in plea negotiations.

If your ERC claim involved any electronic filing, email communications, or online banking, you have potential wire fraud exposure. This is true for virtually all ERC claims. Understanding this exposure is critical to evaluating your risk.

Restitution Is Mandatory And Permanent

Prison time is only part of a federal sentence. In ERC fraud cases, courts must also order restitution. Restitution is the amount you have to pay back to the government for the loss you caused. In ERC cases, thats typically the full amount of the fraudulent credit you received.

If you received $500,000 in ERC payments you werent entitled to, you will be ordered to pay $500,000 in restitution. This is in addition to whatever prison time you receive. The two penalties run together. You serve your time and you still owe the money.

Restitution in federal cases cannot be discharged in bankruptcy. It does not have a statute of limitations. It can be collected through wage garnishment, asset seizure, and other enforcement mechanisms for the rest of your life. If you die before paying it off, the debt can be collected from your estate.

Many defendants focus on prison time as the primary penalty. Thats understandable. But restitution can be financialy devastating over the long term. A person sentenced to 24 months in prison might serve 20 months with good time credit and then spend the next 20 years paying back restitution. The financial consequences can outlast the incarceration consequences by decades.

Criminal History Multiplies Everything

Federal sentencing guidelines assign defendants to one of six criminal history categories based on there prior convictions. Category one is for first-time offenders with no significant criminal history. Category six is for defendants with extensive prior records.

Your criminal history category multiplies the effect of your offense level:

• Offense level 18 + Category one = 27 to 33 months
• Offense level 18 + Category three = 33 to 41 months
• Offense level 18 + Category six = 57 to 71 months

The same underlying offense, more than double the prison time.

For ERC defendants who have prior convictions, even unrelated ones, the criminal history enhancement can add years to there sentence. Prior fraud convictions are particularly damaging because they demonstrate a pattern of conduct. But even prior convictions for completly unrelated offenses will increase your criminal history score and your sentencing range.

Most ERC defendants are business owners or professionals without prior criminal records. For them, criminal history category one applies. But anyone with prior convictions needs to understand that those convictions will directly increase there ERC sentence.

Real Sentencing Examples

The numbers become real when you look at actual cases. In January 2024, Lakisha Pearson was sentenced to 52 months in prison for filing false ERC claims. She was also ordered to pay $15.9 million in restitution. Thats over four years behind bars plus a lifetime of repayment obligations.

In another case, a South Florida tax preparer received nearly five years in federal prison for preparing false tax returns including fraudulent ERC claims. The restitution order exceeded $20 million. This was a tax professional who thought they knew how to work the system. They were wrong.

Other defendants have received sentences ranging from 36 months to over 120 months depending on the amounts involved and there level of participation. The 121 month sentence – over 10 years – shows what happens when large scale fraud combines with aggravating factors.

These are not hypothetical scenarios. These are real people who are sitting in federal prison right now because they claimed ERC credits they werent entitled to. Some of them thought they would never get caught. Some of them thought the amounts were too small to matter. Some of them thought there promoter would protect them. All of them were wrong.

The Current Enforcement Picture

The numbers on ERC fraud enforcement tell a clear story. IRS Criminal Investigation has initiated 545 investigations involving more than $5.6 billion in suspected fraud. Of those 545 investigations, 75 have resulted in federal charges. Of those 75 charged, 38 defendants have already been convicted.

The 38 convicted defendants received an average sentence of 21 months in prison. But that average obscures significant variation. Some defendants received sentences under 18 months. Others received sentences over 50 months. The sentencing outcomes depend on the specific facts of each case.

The largest ERC fraud case involves seven defendants who allegedly filed more than 8,000 false tax returns claiming over $600 million in fraudulent credits. This case shows the scale that organized ERC fraud reached. But it also shows why the government is treating ERC enforcement as a major priority. When individual schemes involve hundreds of millions of dollars, federal prosecutors dedicate significant resources.

The enforcement pipeline is accelerating. The 545 investigations will produce more charges. The 75 charged cases will produce more convictions. The defendants who have not yet been identified will be identified. The defendants who think there case is too small to prosecute may find out otherwise.

The IRS has made clear that this enforcement push is a multi year effort. They have dedicated task forces specifically focused on ERC fraud. They are using data analytics to identify suspicious claims. They are cross-referencing promoter investigations with client lists. The infrastructure for mass prosecution is built and operating. This is not a temporary focus that will fade away. This is systematic enforcement that will continue for years.

People who received ERC payments in 2020 or 2021 and have heard nothing from the IRS should not assume they are safe. The statute of limitations for federal tax crimes is generally six years from the date of the false return. For returns filed in 2021, the government has until 2027 to bring charges. There is plenty of time for the enforcement wave to reach even the smallest cases.

Factors That Can Reduce Your Sentence

Cooperation is the most significant factor that can reduce a federal sentence below the guideline range. When a defendant provides substantial assistance to prosecutors – information that helps them investigate or prosecute other people – the government can file a motion for a downward departure. These departures can be substantial, sometimes reducing sentences by 50% or more.

But cooperation is not free. Substantial assistance means providing genuinely useful information about other people. It means testifying against codefendants, promoters, or others involved in ERC fraud. It means complete honesty about everything you did and everyone you worked with. Prosecutors will not file a cooperation motion for vague promises or self-serving information.

Acceptance of responsibility is another factor that can reduce your offense level. If you plead guilty and demonstrate genuine remorse, you can receive a two or three level reduction in your offense level. This reduction is almost automatic for defendants who plead guilty early in the case. Its not available to defendants who go to trial.

Other factors that can influence sentencing include health issues, family responsibilities, employment history, and community ties. These factors dont affect the guideline calculation directly, but they can influence a judges decision to sentence within or below the range. Defense attorneys present these factors as reasons for leniency.

What This Means For Your Case

If youre facing potential ERC fraud charges, the penalty analysis starts with calculating your tax loss. Add up the fraudulent ERC amounts across all quarters and all businesses. That total drives your base offense level.

From there, consider your criminal history. Prior convictions increase your sentencing range. No criminal history means category one and the lowest range for your offense level.

Consider the charges. If prosecutors charge wire fraud instead of or in addition to tax fraud, your maximum exposure increases dramatically. The charging decision affects your leverage and your risk if you go to trial.

Consider restitution. Whatever ERC you received improperly will have to be paid back. This is in addition to prison time. The financial obligation is permanent.

Finally, consider cooperation. If you have information about promoters, preparers, or others involved in ERC fraud, that information has value. Substantial assistance can significantly reduce your sentence. But cooperation decisions should be made with experienced legal counsel.

Getting Legal Help

Federal criminal sentencing is complex. The guidelines, the charging decisions, the cooperation calculations, and the restitution requirements all interact in ways that require professional analysis. Trying to navigate this system without experienced legal help is a serious mistake.

A federal criminal defense attorney can calculate your likely sentencing range based on the specific facts of your case. They can advise on whether cooperation makes sense and negotiate the terms. They can challenge the governments tax loss calculation if its inflated. They can present mitigating factors to argue for a below-guideline sentence.

The difference between effective representation and poor representation can be years of prison time. ERC fraud cases involve significant exposure and require attorneys who understand federal tax crimes and the federal sentencing system. This is not the time for a general practitioner or a lawyer who primarily handles state cases.

If you have reason to beleive you may face ERC fraud charges, the time to consult with an attorney is now. Decisions made early in the process – whether to cooperate, how to respond to grand jury subpoenas, whether to enter the voluntary disclosure process – can dramatically affect your ultimate sentence. Those decisions require informed legal guidance.

The penalties for ERC fraud are real. Prison time is being imposed. Restitution is being ordered. Understanding what youre facing is the first step toward protecting yourself.

The Long Term Consequences Beyond Prison

Even after serving your sentence and completing supervised release, the consequences of an ERC fraud conviction continue. A federal felony conviction is a permanent part of your record. It affects employment opportunities, professional licenses, and business relationships for the rest of your life.

Many ERC defendants are business owners and professionals. A federal fraud conviction can result in the loss of professional licenses including CPA licenses, law licenses, and real estate licenses. State licensing boards take federal convictions seriously, and the licensing consequences often outlast the prison sentence.

Banks and financial institutions will see the conviction. Getting business loans, opening accounts, and maintaining banking relationships becomes difficult. Vendors and customers may stop doing business with you. Insurance companies may refuse coverage. The business consequences compound over time.

For business owners, the ERC fraud conviction can destroy a business they spent decades building. Even if the business survives the investigation and prosecution, the reputational damage and operational disruptions may be fatal. Employees, customers, and partners all react to federal criminal charges.

The financial consequences extend beyond restitution. Legal fees for federal criminal defense are substantial. The IRS will also pursue civil penalties and interest on top of criminal restitution. Asset seizures during the investigation may have already depleted resources. The total financial impact often exceeds the amount of ERC claimed.

These long term consequences are rarely discussed when people evaluate there risk. The focus is usually on prison time. But for many defendants, the collateral consequences of conviction are more devastating than the incarceration itself. Understanding the full scope of what youre facing is essential to making informed decisions about how to respond.