Criminal Defense Lawyers

Signs Your ERC Claim Is Under Criminal Investigation

The scariest moment in an ERC investigation isn’t when federal agents knock on your door. It’s the weeks of silence before that knock happens, when your auditor stops returning calls and you have no idea why. Most people interpret that silence as good news. Maybe the IRS lost interest. Maybe they moved on to other cases. The opposite is usually true. When a civil auditor goes quiet during an ERC examination, it often means they’ve spotted something that triggered a referral process you’ll never be told about until it’s too late.

IRS Criminal Investigation has initiated more than 545 ERC fraud investigations covering over $5.6 billion in suspected fraud. Seventy-five of those investigations have already resulted in federal charges. Thirty-eight defendants have been convicted, with an average prison sentence of 21 months. The conviction rate in COVID fraud cases is 97.4 percent. These aren’t theoretical numbers. This is happening right now, to real business owners, many of whom had no idea they were under criminal investigation until the day they were arrested.

This article explains the warning signs that your ERC claim has crossed from civil examination into criminal investigation. Some of these signs are obvious. Most are not. Understanding what to look for could be the difference between years in federal prison and resolving a tax matter administratively.

The Silence That Should Terrify You

When a civil IRS auditor uncovers indicators of fraud, they’re required by IRS procedures to suspend the examination immediately. They must stop asking questions, stop requesting documents, and stop communicating with you altogether. Critically, there not allowed to tell you why there going silent. The Internal Revenue Manual is explicit about this: when fraud is suspected, the auditor “will suspend the examination/collection activity without disclosing to the taxpayer or representative the reason for the suspension.”

Think about what that means. Your auditor was asking questions, requesting documents, maybe scheduling follow-up calls. Then suddenly, nothing. You call and they dont respond. You email and get no reply. Appointments get canceled without explanation. Most people assume this is bureaucratic incompetence. Sometimes it is. But often, that silence is the loudest warning sign you’ll ever get.

What happend behind the scenes during that silence is a three-stage escalation process that you never see. Stage one was your civil audit. Stage two is the auditor consulting with there group manager and then contacting a Fraud Enforcement Advisor. Stage three is a formal criminal referral to IRS Criminal Investigation. By the time you realize whats happening, multiple layers of IRS management have already reviewed your case and concluded theres enough evidence to pursue criminally.

Understanding the Three-Stage Escalation

The people who decide wheather your ERC audit becomes a criminal case are people youll never meet or speak with. Heres how the system actualy works.

When your civil auditor sees something that looks like fraud, they cant just keep investigating. There required to stop and talk to there group manager immediatly. If the manager agrees something looks wrong, they contact a Fraud Enforcement Advisor. The FEA is basicly a fraud specialist who evaluates wheather the case has criminal potential. You dont interact with the FEA. You dont even know they exist. But there reviewing your documentation and deciding your fate.

If the FEA determines there are “firm indications of fraud” and criminal criteria are met, the auditor prepares Form 2797, the “Referral Report of Potential Criminal Fraud Cases.” This form transfers your case from civil examination to IRS Criminal Investigation. At this point, CI special agents take over. The civil audit is suspended – thats why your auditor stopped responding – and a criminal investigation begins.

Heres the uncomfortable truth: if youve reached this stage, multiple people have already decided your case has criminal merit. Your auditor identified fraud indicators. There group manager concurred. A Fraud Enforcement Advisor reviewed the evidence and agreed. And CI management approved opening a subject criminal investigation. Thats at least four separate decisions by experienced IRS professionals who all concluded you should be criminally investigated. This isnt a computer flagging your return. This is deliberate human judgment at every step.

Warning Sign #1: Your Auditor Goes Dark

The most reliable warning sign is also the most counterintuitive. When your auditor stops communicating, your instinct says thats good news. The reality is often the opposite.

A typical civil audit involves ongoing communication. The auditor requests documents, you provide them, they ask follow-up questions, you answer. If this pattern suddenly stops – especialy if it stops in the middle of an unresolved issue – something may have changed fundamentaly.

The IRS calls this a “suspension” of the examination. But from your perspective, it just looks like silence. You dont recieve any notice saying “we are suspending your examination due to suspected fraud.” You just stop hearing from them. Calls go unreturned. Emails get no response. Scheduled meetings get canceled without rescheduling.

This silence can last weeks or months while the referral process works its way through the system. During this entire period, you have no idea whats happening. Your still thinking you have a civil tax matter. In reality, your case may already be in the hands of Criminal Investigation.

Heres what makes this particularly dangerous: the fact that you havent been arrested yet dosent mean your safe. Criminal tax investigations routinly take one to three years from initiation to indictment. The investigation is running the entire time. Witnesses are being interviewed. Documents are being gathered. A case is being built. You just dont know about it.

Warning Sign #2: Questions About Your Intent

If your still in communication with an IRS auditor and they start asking questions about your state of mind – what you knew, what you intended, why you made certain decisions – pay very close attention. These questions are not casual curiosity.

The difference between civil tax fraud and criminal tax fraud is willfulness. Civil penalties require showing you underpaid taxes. Criminal charges require proving you did it intentionaly. Questions about your intent are designed to establish that willfulness element. When an auditor asks “did you know these wages were also used for PPP forgiveness?” or “why did you believe you qualified for the government order suspension?”, there not trying to understand your thought process. There gathering evidence of what you knew and when you knew it.

Heres the trap. Your natural instinct is to explain yourself. You want to provide context, to show you had good reasons for what you did. But every explanation you give becomes evidence. If your explanation contradicts documents they already have, you’ve just demonstrated consciousness of guilt. If your explanation shows you understood the rules and proceeded anyway, you’ve just proved willfulness.

In criminal cases, defendants are often convicted based on there own statements made during what they thought was a civil examination. The auditor asks questions. You answer trying to be helpful. Those answers get used against you at trial. Prosecutors read your own words back to the jury as proof you knew exactly what you were doing.

Warning Sign #3: Third Parties Being Contacted

Finding out that IRS agents have contacted your accountant, your bank, your business partners, or your employees is actualy worse then being contacted yourself. When the IRS reaches out to third parties about your financial affairs, there building corroboration for a case against you.

Your accountant has no privilege in criminal tax matters. If IRS Criminal Investigation shows up with a summons or if a grand jury subpoenas your accountant to testify, they have to comply. Every conversation you had with your accountant about your ERC claim, every email, every document – all of it can be compelled. The accountant who helped you file the claim might end up testifying against you at trial.

When third parties are contacted, there often asked to keep the inquiry confidential. So your bank might know the IRS is investigating you, but there not allowed to tell you. Your employees might be interviewed without your knowledge. Business associates might be providing information you dont know about. By the time you discover any of this, significant investigation has already occured.

Pay attention to any unusual contact from people in your professional network. If your accountant mentions they recieved an IRS summons, if your bank asks questions about unusual transactions, if employees tell you federal agents came by asking questions – these are all indicators that your case has expanded beyond a routine civil matter.

Warning Sign #4: Your Bank Gets A Subpoena

Theres a critical distinction between an IRS summons and a grand jury subpoena, and understanding the difference tells you alot about who is investigating you.

If IRS Criminal Investigation is conducting the investigation, they use administrative summonses to obtain records. These are serious, but there still within the IRS. However, if a grand jury issues a subpoena for your bank records, that means the Department of Justice is involved. A federal prosecutor has convened a grand jury to investigate potential criminal charges against you. This is a major escalation.

Banks are often required to notify customers when there records are subpoenaed – but not always. In some cases, courts issue orders prohibiting the bank from telling you about the subpoena at all. So you might find out about a grand jury investigation into your finances from your bank, or you might find out years later when you get indicted. Either way, by the time grand jury subpoenas are flying, the criminal investigation is well underway.

If your bank contacts you about any type of legal process related to your accounts, treat it as an emergency. A summons is bad. A grand jury subpoena is worse. Both indicate your case has moved far beyond civil tax examination.

Warning Sign #5: Special Agents Appear

IRS Criminal Investigation special agents are federal law enforcement officers. There the only armed employees of the IRS. They carry gold badges and guns. If someone with a gold badge and a gun identifies themselves as an IRS special agent and wants to talk to you, your in serious trouble.

Heres the irony: special agents are trained to approach you when your least prepared and least expecting it. They might wait by your car after you leave the gym. They might approach you outside a restaurant. They might show up at your workplace or home unannounced. The goal is to catch you off guard, when you havent had time to prepare or consult with a lawyer.

Special agents typically travel in pairs. If two people approach you together, both showing gold badges, and one of them reads you something that sounds like a Miranda warning, your not dealing with civil auditors anymore. Your dealing with federal law enforcement officers who want to question you about potential criminal violations.

At this point, the investigation is advanced. Special agents dont show up early in an investigation. There usually the last step before potential arrest. If special agents are talking to you, or if you learn there talking to people who know you, the criminal investigation has been running for some time and is likely approaching a decision point about charges.

The Reverse Eggshell Audit – When Its Already Criminal

Tax professionals use the term “eggshell audit” to describe a civil audit that has criminal potential lurking underneath. The taxpayer knows there are problems, and the audit could crack open into a criminal matter at any time.

But theres something worse: the reverse eggshell audit. This is a criminal investigation thats disguised as a civil audit. You think your just dealing with a routine examination. Your answering questions, providing documents, cooperating fully. What you dont know is that a Fraud Enforcement Advisor or someone from Criminal Investigation is pulling strings behind the scenes. The civil auditor is being directed to gather specific evidence. Your cooperation is building the criminal case against you.

The reverse eggshell audit is particuarly dangerous becuase you have no idea your in one. Everything looks normal. The auditor seems like a regular civil examiner. You provide information thinking your resolving a tax dispute. In reality, every document you produce and every statement you make is being evaluated for criminal prosecution.

This is why criminal tax defense attorneys warn against letting regular CPAs or accountants handle audits with fraud potential. Only attorneys have privilege. Only attorneys can protect against self-incrimination. If your in a reverse eggshell audit and your represented by an accountant instead of an attorney, everything you say through that accountant can be used against you.

What The Statistics Tell You

The numbers around ERC criminal enforcement should eliminate any doubt about how serious this is.

As of February 2025, IRS Criminal Investigation has initiated 545 ERC-related investigations covering more then $5.6 billion in suspected fraud. Of those, 75 have resulted in federal charges. 38 defendants have already been convicted. The average prison sentence for ERC fraud is 21 months – almost two years in federal prison.

For broader COVID fraud, the numbers are even more stark. The conviction rate is 97.4 percent. The average sentence is 31 months. IRS-CI has launched over 2,000 COVID fraud investigations totaling $10 billion in attempted fraud.

What does a 97.4 percent conviction rate mean for you? It means that if the IRS decides to pursue criminal charges, you will almost certainly be convicted. Federal prosecutors dont bring cases they arent confident they can win. By the time your indicted, theyve already assembled the evidence, interviewed the witnesses, and determined that conviction is nearly certain. Fighting at trial with those odds is choosing to lose.

The IRS has also been investigating promoters – the ERC mills that filed questionable claims for thousands of clients. Nine promoter investigations are currently open, with another 123 under review. If your claim was prepared by one of these promoters, your case may be batched with others from the same preparer. The promoter investigation connects to your investigation. There problems become your problems.

Withdrawal Wont Save You

Some business owners learn about IRS enforcement and think they can solve the problem by withdrawing there ERC claim. The IRS even has a withdrawal program that lets you take back a claim as if it was never filed. No penalties, no interest, clean slate. Sounds like a solution.

Heres what the IRS explicitly states about withdrawal: “Those who have willfully filed fraudulent claims or conspired to do so should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.”

Read that again. Withdrawing a fraudulent claim does not protect you from criminal prosecution.

If your claim was legitimately mistaken – you thought you qualified but you didnt – withdrawal might be appropriate. But if the claim was fraudulent, if you knew it was wrong when you filed it, withdrawal is not a get-out-of-jail-free card. The criminal exposure already exists. The withdrawal might reduce civil penalties, but it does nothing for criminal liability.

In fact, being offered the chance to withdraw can itself be a warning sign. If an auditor suggests you might want to “consider withdrawal,” they may be giving you a favor before things get worse. Its not a guarantee your in criminal trouble, but its also not the kind of suggestion that comes up in routine examinations.

What To Do If You See These Signs

If any of these warning signs apply to your situation, you need specialized help immediately. Not a regular CPA. Not the accountant who helped file your ERC claim. You need a criminal tax defense attorney.

Heres why the distinction matters. Attorney-client privilege protects communications with attorneys. Accountants have no such privilege in criminal matters. If your accountant represents you in an audit and the case goes criminal, the accountant can be compelled to testify about everything you discussed. An attorney cannot.

Some criminal tax attorneys work with CPAs under whats called a Kovel agreement. This arrangement extends attorney-client privilege to the CPA’s work, but only when the CPA is working under the direction of the attorney. If you need accounting help during a criminal investigation, it must be structured this way to maintain privilege.

Do not call the IRS to ask about your case. Do not try to explain yourself. Do not provide additional documentation hoping it will clear things up. Every interaction with the IRS without proper representation creates risk. If your case has criminal potential, you could make things worse with a single phone call.

The goal of early intervention is to prevent criminal charges from being filed. Once your indicted, the 97.4 percent conviction rate applies. Before indictment, there are strategies to influence wheather charges get filed at all. But those strategies require experienced criminal tax defense counsel and they require acting before its too late.

If your auditor went silent, if third parties have been contacted, if you received questions about your intent, if your bank got a subpoena, or if anyone with a gold badge wants to talk to you – stop everything and get help now.