Criminal Defense Lawyers

What Happens When Your ERC Claim Becomes A Criminal Investigation

The number you need to understand is 97.4 percent. That’s the conviction rate in COVID fraud cases prosecuted by IRS Criminal Investigation. Out of every hundred people the government charges with ERC fraud, ninety-seven get convicted. This isn’t a coin flip. This isn’t a gamble where you might get lucky. If your ERC claim becomes a criminal case and you end up indicted, you are almost certainly going to prison.

IRS Criminal Investigation has initiated 545 investigations into ERC claims covering more than $5.6 billion in suspected fraud. Seventy-five of those investigations have already resulted in federal charges. Thirty-eight defendants have been convicted so far, with an average prison sentence of twenty-one months. These aren’t projected numbers or theoretical scenarios. These are real prosecutions that have already happened, with real people sitting in federal prison right now because of how they claimed the Employee Retention Credit.

This article explains what happens when an ERC claim crosses from civil examination into criminal investigation, what the investigation process looks like, what charges you might face, and what the consequences are if convicted. If you’re worried that your claim might become a criminal matter – or if it already has – understanding this process is the first step toward protecting yourself.

The Scale of Criminal Enforcement

The Department of Justice isn’t treating ERC fraud as a minor enforcement priority. They created a dedicated unit called the Fraud Strike Force specifically to pursue COVID relief fraud including ERC cases. DOJ has publicly stated that this enforcement will “occupy a substantial portion of DOJ attention for years to come.” This isnt a temporary crackdown that will fade away. This is sustained, long-term prosecution that will continue for the foreseeable future.

The numbers tell the story. IRS Criminal Investigation has launched 2,039 total COVID fraud investigations covering $10 billion in attempted fraud. Over a thousand people have been indicted. Five hundred sixty-nine have already been sentenced, with an average prison term of thirty-one months – nearly three years in federal prison.

ERC fraud is a significant subset of this larger enforcement wave. The 545 ERC-specific investigations represent billions in claims that the government believes were fraudulent. And the investigation pipeline is still flowing. New cases are being opened. New referrals are being made. New indictments are being filed. If your claim is problematic, the fact that you havent heard from anyone yet dosent mean your safe.

Heres the uncomfortable truth that nobody wants to hear: criminal tax investigations routinely take one to three years from initiation to indictment. The government dosent rush these cases. They build them carefully, methodically, documenting everything. You could be under investigation right now and have no idea until the day federal agents show up at your door.

The $600 Million Case

The largest ERC fraud case in United States history involved seven defendants who filed over eight thousand quarterly payroll tax returns claiming more than $600 million in fraudulent credits. They successfully obtained $44 million before they were caught. What did they do with the money? Jewelry. Luxury automobiles. Designer clothing. Electronics.

Now those same people are facing decades in federal prison. The charges include:

• Conspiracy to defraud the United States
• Wire fraud
• Aiding and assisting the preparation of false tax returns

Wire fraud alone carries a maximum penalty of twenty years – and becuase COVID was a presidentially declared emergency, the maximum is actually thirty years for fraud related to pandemic relief programs.

This case illustrates something important about how the government views ERC fraud. They dont see it as a tax dispute. They see it as theft from the American people. When prosecutors stand in front of a jury and describe defendants who stole hundreds of millions of dollars meant for struggling businesses and spent it on luxury goods, the conviction is almost guaranteed. Juries dont have sympathy for that.

The eight thousand false returns in that case means eight thousand businesses were used as vehicles for fraud. Some of those businesses may not have known there claims were fraudulent. Some may have been created specifically for the scheme. Either way, every one of those returns is now evidence in a federal investigation. Every signature on every form is a potential defendant or witness.

How Civil Becomes Criminal

Your ERC claim starts as a civil tax matter. You filed a Form 941-X claiming a refund. The IRS either processes it, audits it, or denies it. At this point your dealing with the civil side of the IRS – revenue agents, auditors, examiners. The worst that can happen is they deny your claim, assess penalties and interest, and demand repayment.

But there is a line that changes everything. When a civil auditor uncovers indicators of fraud – not just mistakes, not just aggressive positions, but actual fraud – they are required to suspend the examination and refer the case to IRS Criminal Investigation. At that moment, your tax matter becomes a potential criminal prosecution.

The referral process works like this:

1. The civil auditor notices something that looks wrong
2. They stop the examination and consult with there supervisor
3. If the supervisor agrees, they contact a Fraud Enforcement Advisor who evaluates wheather the case has criminal potential
4. If the FEA determines there are “firm indications of fraud,” the auditor prepares Form 2797 – a formal criminal referral
5. Your case gets transferred from civil examination to IRS Criminal Investigation

Heres what makes this terrifying. Your not told this is happening. The Internal Revenue Manual explicitly requires that “the examination/collection activity will be suspended without disclosing to the taxpayer or representative the reason for the suspension.” You just notice that your auditor stopped responding. Calls go unanswered. Emails get no reply. You think maybe they lost interest in your case. In reality, your case just became a criminal matter and you have no idea.

What IRS Criminal Investigation Does

IRS Criminal Investigation is a federal law enforcement agency. CI special agents are the only armed employees of the IRS. They carry gold badges and guns. When they show up at your door, your not dealing with tax auditors anymore. Your dealing with federal agents who have the authority to arrest you.

CI investigates potential criminal violations of the Internal Revenue Code. There job is to gather evidence, interview witnesses, analyze documents, and build cases that can be prosecuted. When CI takes your case, they are looking for proof of willful violations – evidence that you knew what you were doing was wrong and did it anyway.

The investigation phase can last years. CI agents will:

• Pull your bank records
• Examine your emails
• Interview your employees
• Talk to your accountant
• Subpoena documents from third parties
• Reconstruct your finances in detail
• Document everything that suggests you knew the claim was improper

Your promoter – the company that filed your ERC claim – may already be under investigation. The IRS Office of Promoter Investigations has recieved hundreds of referrals about individuals and businesses that facilitated fraudulent claims. When a promoter gets investigated, every client file in there records becomes potential evidence. Your name is in those files. Your signed returns are in those files. Your communications with the promoter are in those files.

If your promoter is cooperating with the government – and many do cooperate to reduce there own sentences – they may be providing information about clients. The person you paid to help you file your ERC claim could be the person helping the government build a case against you.

The Federal Charges

ERC fraud typically results in several federal charges, often stacked together. Understanding what your facing helps you understand the stakes.

Conspiracy to Defraud the United States carries a maximum penalty of five years in federal prison. This charge applies when two or more people agree to commit an offense against the United States. If you worked with a promoter to file a fraudulent claim, that could be conspiracy.

Wire Fraud is the most common charge in ERC cases. Any use of electronic communications – email, phone calls, electronic fund transfers – in connection with a scheme to defraud can be charged as wire fraud. Regular wire fraud carries twenty years maximum. But becuase COVID was a federally declared emergency, wire fraud related to pandemic relief programs carries a maximum of thirty years in prison.

Mail Fraud is similar to wire fraud but involves use of the postal service. Same penalties – twenty years normally, thirty years for emergency-related fraud.

Aiding and Assisting the Preparation of False Returns under Section 7206(2) carries three years per count. If you helped prepare multiple false returns, each one can be charged separately.

Tax Evasion under Section 7201 carries five years per count.

These charges can be stacked. The $600 million case defendants face five years for conspiracy, plus thirty years for each wire fraud count, plus three years for each false return count. The theoretical maximum exposure is measured in decades, not years.

The Restitution Trap

Prison is only part of the punishment. Federal judges are required to order restitution in fraud cases. That means paying back every dollar obtained through the fraud – not just the portion you kept, but the entire amount including whatever your promoter took as fees.

Lakisha Pearson was sentenced to fifty-two months in federal prison for ERC fraud. She was also ordered to pay $15.9 million in restitution. Think about what that means. She will spend over four years in prison. When she gets out, she will owe nearly sixteen million dollars to the government. That debt dosent go away. It cant be discharged in bankruptcy. It will follow her for the rest of her life.

Leon Haynes was convicted for a $170 million ERC fraud scheme involving nineteen hundred false returns. Fifteen counts. Sentencing is scheduled for March 2026. Whatever prison sentence he recieves, the restitution will be in the hundreds of millions. He will never be able to pay it. But that wont stop the government from trying to collect for the rest of his life.

This is the reality of ERC fraud prosecution. You dont just go to prison and then start over. You come out owing an amount of money that will effectively make you a debtor to the government forever. Wages garnished. Tax refunds seized. Assets taken. For decades after you serve your time.

The Promoter Connection

Many business owners who claimed ERC did so through promoters – companies that promised guaranteed eligibility, risk-free refunds, and expert preparation. These promoters charged contingency fees of twenty to twenty-five percent. They made millions filing claims for thousands of clients. And many of them are now under criminal investigation.

When a promoter gets investigated, there client list becomes evidence. Federal agents seize records. They see every business that promoter filed claims for. They see the fee agreements. They see the calculations. They see any communications about eligibility. Every client becomes a potential subject of the investigation.

Some promoters cooperate with the government. Facing decades in prison, they provide information about clients, about how they operated, about who knew what. The promoter’s incentive is to minimize there own culpability by maximizing yours. “The clients knew the claims were aggressive.” “The clients provided false information.” “The clients ignored my warnings.” Every statement that makes you look more responsible makes the promoter look less responsible.

You paid them to help you. Now they may be testifying against you. Thats the bitter irony of the promoter relationship in ERC cases. The expert you trusted could be the witness who sends you to prison.

What They’re Looking For

Criminal tax cases require proving willfulness – that you knew what you were doing was wrong and did it anyway. This is different from civil cases where the IRS just needs to show you owed more tax. Criminal cases require proving you intentionaly violated the law.

The evidence of willfulness comes from many sources:

• Communications where you discussed the questionable nature of your claim
• Prior tax knowledge that suggests you understood the rules
• Concealment of information from the IRS
• False statements to auditors
• Destruction of documents
• Lies to investigators

Your own statements are often the most damaging evidence. During a civil audit, you might have answered questions trying to be helpful. Those answers were recorded. If your case becomes criminal, prosecutors will use your own words against you. “The defendant stated he knew the wages were also claimed for PPP forgiveness.” “The defendant admitted he didnt actualy experience a suspension of operations.” Every word you said to an auditor can come back at trial.

This is why criminal tax defense attorneys tell clients to stop talking the moment there’s any indication of criminal potential. The civil auditor is not your friend. The questions they ask are not casual curiosity. Everything you say can and will be used against you.

If You’re Under Investigation

If you have any reason to beleive your ERC claim is under criminal investigation, you need specialized legal help immediately. Not a CPA. Not the accountant who helped file the claim. A criminal tax defense attorney.

The distinction matters becuase of privilege. Attorney-client communications are protected. Accountant-client communications are not protected in criminal cases. If your accountant represents you during an investigation and the case goes to trial, the accountant can be compelled to testify about everything you discussed. An attorney cannot.

Do not contact the IRS to explain yourself. Do not provide additional documentation. Do not try to withdraw your claim thinking that will make the problem go away. The IRS has explicitly stated that “withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.”

Do not talk to investigators without your attorney present. If federal agents show up at your door wanting to ask questions, you have the right to remain silent and the right to have an attorney present. Exercise those rights. Politely decline to answer questions. Give them your attorney’s contact information. Do not try to explain or justify anything.

The goal of early intervention in a criminal tax investigation is to prevent charges from being filed in the first place. There are strategies that experienced defense counsel can employ – cooperation agreements, voluntary disclosures, factual presentations to prosecutors. But these strategies only work before indictment. Once your charged, the 97.4 percent conviction rate applies. The time to act is before that happens.

The Stakes

Federal prison is not like state prison or county jail. You will serve at least eighty-five percent of your sentence. For a twenty-one month sentence – the current average for ERC fraud – that means at least eighteen months in a federal facility. No early release. No good behavior reducing your time below that floor.

You will lose your business. You will lose your professional licenses. You will lose years of your life. And when you get out, you will owe restitution that you may never be able to pay.

The government has made clear that ERC fraud enforcement is a priority. The Fraud Strike Force exists to prosecute these cases. IRS Criminal Investigation has hundreds of active investigations. New charges are being filed every month. This isnt going to stop.

If you claimed the ERC and your worried about your claim, the worst thing you can do is nothing. Get the file. Review what was filed in your name. Assess wheather the claim was legitimate. If there are problems, talk to a criminal tax defense attorney about your options. The window for proactive defense is narrowing. Dont wait until agents are at your door.

The Timeline of Criminal Cases

Criminal tax investigations dont move quickly. Understanding the timeline helps you understand why you might not have heard anything yet – and why that dosent mean your safe.

The investigation phase typically lasts one to three years. During this time, CI agents are gathering evidence, interviewing witnesses, issuing subpoenas, and building the case. You may have no idea this is happening. The first indication might be when a third party tells you they were contacted by federal agents asking about you. Or it might be when agents appear at your door with questions.

After investigation comes the referral to the Department of Justice. CI presents the case to federal prosecutors who decide wheather to seek an indictment. This evaluation can take several months. Prosecutors review the evidence, assess the strength of the case, consider the potential defenses. They dont bring cases they arent confident they can win.

If prosecutors decide to proceed, they present the case to a grand jury. The grand jury hears evidence and decides wheather there is probable cause to charge. Grand juries almost always return indictments when prosecutors recommend them. The saying in legal circles is that a good prosecutor could indict a ham sandwich.

After indictment, the case moves to trial unless a plea agreement is reached. Most defendants plead guilty. Going to trial against a 97.4 percent conviction rate is a losing bet for most people. The plea negotiations happen between indictment and trial. Defendants who cooperate, who accept responsibility, who provide useful information – they may get reduced sentences. Defendants who fight and lose typically get harsher sentences.

From the start of investigation to sentencing, the entire process can take three to five years. If your claim was filed in 2021 or 2022 and hasnt been flagged yet, that dosent mean it wont be. The investigation machine is still running. Cases are still being built. Indictments are still being filed. The fact that your havent been contacted yet proves nothing about wheather you will be contacted tomorrow.

What Cooperation Looks Like

If your facing a criminal ERC investigation, cooperation with the government is one option your attorney may discuss. Cooperation dosent mean you avoid consequences. It means you may get reduced consequences in exchange for helping the government prosecute others.

Cooperation typically involves providing information about your promoter, about how the scheme worked, about who else was involved. Prosecutors want to move up the chain. They want the organizers, the ringleaders, the people who designed the fraud. Individual clients who cooperate and provide useful information may recieve substantial reductions in there sentences.

The 5K1.1 motion – named after the federal sentencing guideline – allows prosecutors to request a sentence below the otherwise applicable range based on a defendant’s “substantial assistance.” This is the mechanism that rewards cooperation. Defendants who provide testimony, documents, and information that helps convict others can see there sentences cut significantly.

But cooperation isnt for everyone. You have to have useful information. You have to be willing to testify. You have to accept that your pleading guilty to federal crimes. And theres no guarantee of how much reduction youll actually recieve until the judge makes the final decision.

The decision to cooperate should only be made with experienced criminal defense counsel. Cooperation done wrong can make things worse. Information provided without a proper agreement can be used against you. The process has to be handled carefully to actually benefit the defendant.

The Reality Check

If your ERC claim was prepared by a promoter who promised guaranteed results, if the eligibility basis was questionable, if the calculations were inflated – you need to understand the risk your facing. This isnt about scaring you into paralysis. Its about giving you accurate information so you can make informed decisions.

The government has convicted ninety-seven percent of the COVID fraud defendants theyve charged. The average sentence is measured in years. The restitution is measured in millions. This is federal prison and federal debt, not a tax dispute you can negotiate away.

The time to act is now, while you still have options. Talk to a criminal tax defense attorney. Evaluate your exposure honestly. Understand what was filed in your name and wheather it can be defended. If you need to take protective action, take it before the investigation reaches you. Once your indicted, your options narrow dramatically.

The ERC enforcement wave is not subsiding. Its building. Every month brings new investigations, new charges, new convictions, new sentences. The question isnt wheather the government is serious about this. The question is wheather your prepared for what might be coming.