Criminal Defense Lawyers

What is ERC Fraud

The pandemic relief designed to save your business has become the mechanism to destroy it. That’s what ERC fraud looks like from the IRS perspective. You claimed the Employee Retention Credit because a promoter told you that you qualified. The promoter took 15% of your refund upfront. Now the IRS is disallowing your claim, demanding you repay 100% of the credit plus penalties plus interest, and the promoter has disappeared with your money. This isn’t hypothetical. The IRS has sent 28,000 disallowance letters representing $5 billion in improper claims. Over 84,000 returns have been partially or fully disallowed. The enforcement wave has already started.

Welcome to Spodek Law Group. We’re putting this information on our website because ERC fraud has become the largest pandemic-related tax enforcement action in history. The IRS has over 450 criminal investigations covering nearly $7 billion in claims. Todd Spodek has represented business owners who genuinely believed they qualified for the Employee Retention Credit. They trusted promoters who promised them “free money” from the government. They discovered their “qualification” was criminal fraud, their promoter was building a case against them, and the IRS was coming for every dollar plus more.

The irony is brutal. The same government that created the Employee Retention Credit to help businesses survive COVID-19 is now prosecuting businesses for claiming it. The credit was real. The eligibility was fabricated by promoters who collected their fees and left business owners holding the liability. And the enforcement numbers are staggering – over 45 federal charges filed, 27 convictions, and sentences averaging 24-25 months. This is happening constantly.

The Pandemic Relief That Became a Trap

Heres the paradox that destroys businesses. The Employee Retention Credit was legitimate pandemic relief. Congress created it to help businesses that continued paying employees during COVID-19 shutdowns or revenue declines. The credit was substantial – up to $5,000 per employee for 2020, and up to $21,000 per employee for 2021.

The problem started when promoters turned this legitimate relief program into an industrial fraud operation. They ran aggressive advertising campaigns on radio, television, and online. They told businesses they could claim “up to $26,000 per employee.” They promised the application process was “easy” and they could determine eligibility “within minutes.” What they didnt tell businesses was that the eligibility requirements were complex, specific, and that most of there clients didnt actualy qualify.

Think about the incentive structure. Promoters charged contingency fees – typically 15% of the refund. On a $500,000 claim, thats $75,000. The promoter has every incentive to file as many claims as possible, regardless of whether the business actualy qualifies. They get paid when the refund arrives. When the IRS disallows the claim years later, the promoter is long gone.

And heres were the trap snaps shut. The business owed the credit back – 100% of it. Plus accuracy penalties of 20%. Plus potential fraud penalties of 75%. Plus interest thats been accruing since the credit was paid. The promoter kept there fee. The business paid for the privilege of committing fraud it didnt even know it was committing.

How the Scheme Actually Works

Heres how ERC fraud actualy operates. Understanding the mechanics matters becuase the IRS uses each step as evidence of fraud.

The ERC was designed for businesses that either experienced a government-ordered shutdown or had significant declines in gross receipts. For 2020, the threshold was a 50% decline compared to the same quarter in 2019. For 2021, it was a 20% decline. These arent vague requirements – they require actual financial documentation proving the decline.

Promoters ignored these requirements. They filed claims for businesses that never shut down. They filed claims for businesses that actualy grew during the pandemic. They filed claims for shell companies with no real employees. In the largest ERC fraud scheme, promoters filed over 8,000 quarterly payroll tax returns claiming over $600 million in credits – for businesses that in most cases had no legitimate operations or employees.

The fraud got more sophisticated over time. Some promoters sent fake letters from non-existent agencies like the “Department of Employee Retention Credit” to make the scheme look official. Others created documentation to fabricate the revenue declines that never happened. The IRS has identified patterns showing promoters literally manufactured eligibility for clients who had none.

Heres the inversion that destroys businesses. The question isnt “did I qualify for ERC.” The question is “did my promoter lie about my qualifications.” The credit was real. The eligibility was fabricated. And the business owner signed the return.

The Promoter Machine

Heres something that should terrify anyone who claimed ERC through a promoter. The promoters had no skin in the game. They collected there fees upfront, and when the IRS comes calling, your on your own.

Promoters charged contingency fees as high as 15% of the refund amount. On a $500,000 refund, thats $75,000. The promoter collects that money when the refund arrives. The business thinks its free money – they didnt have to pay anything out of pocket.

But heres the cascade. The IRS audits the claim. The claim gets disallowed. Now the business owes $500,000 back to the IRS – plus 20% accuracy penalties, plus potential 75% fraud penalties, plus years of interest. The promoter still has there $75,000. The “free money” became the most expensive mistake the business ever made.

Some promoters were even more aggressive. “1099 Tax Pros” in Utah submitted over 1,000 false forms claiming more then $11 million in fraudulent credits. The scheme operated like a factory – high volume, no verification, maximum fees.

And the promoters kept selling even after the IRS announced its moratorium on September 14, 2023. They kept running advertisements. They kept promising “easy” qualifications. They knew the claims were problematic. They filed them anyway.

The Enforcement Wave

Lets look at the numbers that show whats actualy happening. This isnt hypothetical enforcement – its already underway.

The IRS has initiated over 450 criminal investigations covering nearly $7 billion in ERC claims. Forty-five investigations have resulted in federal charges. Twenty-seven have resulted in convictions. The average sentence is 24-25 months in federal prison.

But those numbers are just the criminal side. On the civil side, the enforcement is even larger. The IRS sent 28,000 disallowance letters representing $5 billion in improper payments. Over 84,000 returns have been partially or fully disallowed. And heres the system revelation that matters – 597,000 ERC claims remain in the IRS inventory. The enforcement wave hasnt even fully started.

On September 14, 2023, the IRS imposed a moratorium on processing new ERC claims. But the moratorium didnt stop enforcement. It actualy accelerated it. The IRS shifted from processing all claims to processing only “low-risk” claims while intensifying audits and criminal investigations on questionable ones.

Think about what that means. If your claim is sitting in the inventory, its becuase the IRS hasnt decided what to do with it yet. When they do decide, the outcomes are disallowance, audit, or criminal investigation. Theres no good outcome in the queue.

The People Who Built Prison Sentences

Lets look at what actualy happens to the people who designed and promoted these schemes.

In January 2025, the Department of Justice announced the indictment of seven individuals in the largest ERC fraud scheme in the nations history. Keith Williams and his co-defendants operated through a business called “Credit Reset.” They filed over 8,000 quarterly payroll tax returns claiming over $600 million in credits. Most of the businesses they claimed for had no legitimate operations or employees. They successfully obtained over $44 million, which they spent on jewelry, electronics, designer clothing, and luxury automobiles.

Heres the hidden connection that shows how out of control this became. In Operation Fraud Street Mafia, a prison inmate led a multi-million dollar ERC fraud scheme from behind bars. His mother, her spouse, and other co-conspirators filed hundreds of payroll tax returns claiming over $550 million in refunds. The promoters didnt even need to be free to run the fraud.

Lakisha Pearson was sentenced to 52 months in federal prison and ordered to pay $15.9 million in restitution. Thats over four years in prison for pandemic relief fraud.

But heres the most disturbing case. In the $93 million Los Angeles scheme, two defendants attempted to murder the ringleader to prevent him from talking to law enforcement. Kristerpher Turner was shot multiple times in broad daylight at an office park. He survived. Hes paralyzed. And the case continues. The stakes in these cases have literally become life and death.

The Disallowance Letters

Heres something that creates permanant anxiety for businesses with pending claims. The IRS has sent over 84,000 disallowance letters – and many of them dont even explain why the claim was denied.

The IRS has acknowledged this was a mistake. Some letters failed to inform taxpayers of there appeal rights or the basis for the disallowance. But the deadline to appeal keeps running regardless. Businesses that dont understand why there claim was denied still have to file appeals within the deadline, or they loose there right to contest.

Think about that cascade. You recieve a disallowance letter. It dosent tell you why your claim was rejected. You dont understand what you did wrong. You miss the appeal deadline becuase you didnt know you needed to act. Now you owe the full amount, no questions asked.

The disallowance letters are just the beginning. The IRS estimates these 28,000 letters alone forestalled $5 billion in improper payments. But theres 597,000 more claims in inventory. Each one represents a business thats waiting to find out whether there claim was legitimate – or whether the IRS is coming for there money.

The Voluntary Disclosure Choice

Heres something that creates impossible choices for businesses. The IRS offered Voluntary Disclosure Programs for businesses that claimed ERC improperly. The terms sound punitive. They were actualy the best option available.

The first VDP ran through March 2024. Businesses could repay 80% of the credit they recieved – keeping 20% – with no penalties or interest. Over 2,600 applications disclosed $1.9 billion in improper credits.

The second VDP ran through November 2024. This time, businesses had to repay 85% – keeping only 15%. Still no penalties or interest, but the discount was smaller.

Heres the inversion that matters. Repaying 80% sounds like a penalty. It was actualy a 20% discount compared to what happens if the IRS catches you first. Without the VDP, businesses face full repayment plus 20% accuracy penalties plus potential 75% fraud penalties plus years of interest. An 80% repayment is the cheap option.

And heres the consequence cascade. Over 7,300 businesses withdrew $677 million in claims they had already filed. They voluntarily gave up money they thought was theres becuase they realized the claims were fraudulent. The withdrawal program remains open for unprocessed claims. The question is whether businesses will act before the IRS acts first.

The Promoter Database

Heres something that creates a permanant record. The VDP applications required businesses to identify there advisors. The IRS is building a database of promoters from there victims disclosures.

To qualify for the VDP, employers had to provide the IRS with names, addresses, telephone numbers, and details about services provided by any advisors or tax preparers who assisted with there claims. This isnt optional. Its a requirement.

Think about what that means. The IRS is learning who the promoters are from the businesses they defrauded. Every VDP application adds more names to the promoter database. The IRS is using victims to build cases against the people who victimized them.

And heres the consequence cascade that destroys everyone. The promoter gets caught. The promoter is required to identify all clients. Now the IRS has a list of every business that used that promoter. The IRS contacts each business. Each business discovers they were victims AND targets. The promoters cooperation exposes everyone they ever worked with.

The Criminal Investigation Reality

Heres something that eliminates the “I’ll deal with it later” approach. The IRS isnt waiting. They already have over 450 criminal investigations underway covering nearly $7 billion in claims.

The average sentence for ERC fraud is currently 24-25 months in federal prison. But wire fraud – which is charged in almost every ERC prosecution – carries up to 20 years. Conspiracy carries up to 5 years. Aiding false returns carries up to 3 years. The Credit Reset defendants face up to 20 years each if convicted.

Heres the uncomfortable truth about these sentences. There getting longer as the cases get larger. Lakisha Pearson got 52 months. The Credit Reset defendants face decades. The IRS is sending a message – pandemic relief fraud will be prosecuted aggressively.

And heres the inversion that should concern every business with a pending claim. The question isnt “will the IRS catch me.” The question is “am I already in one of the 450 investigations.” The IRS isnt starting enforcement. There finishing it.

The Conviction Reality

IRS Criminal Investigation achieves conviction rates above 90% on cases they accept for prosecution. For ERC fraud specificaly, the evidence is often overwhelming. Payroll tax returns show what was claimed. Employment records show who actualy worked there. Bank records show were the refund money went. The gap between what promoters claimed and what actualy existed is documented in government databases.

Heres the consequence cascade that destroys everyone involved. The promoter gets prosecuted. There required to turn over client lists – either through subpoena or as part of a cooperation agreement. Every business that used that promoter is now identified. The IRS works through the list. Some businesses face civil audits. Some face criminal referrals. The difference often comes down to size – larger claims attract more scrutiny and harsher treatment.

The entire process can take years, but the IRS plays the long game. ERC claims were filed from 2020 through 2021. The moratorium started in September 2023. Major prosecutions are happening in 2024 and 2025. Three to five years isnt unusual. But the sentences – measured in years, not months – show the government treats this seriously.

And heres the system revelation that matters. The IRS compliance efforts have topped $1 billion since the moratorium. Thats not a budget allocation. Thats money recovered from fraudulent claims. The enforcement is paying for itself. Which means it will continue.

The Civil vs Criminal Line

Heres something that creates constant anxiety for businesses with ERC exposure. The difference between civil liability and criminal prosecution often comes down to factors outside your control.

Civil liability means you owe the credit back, plus penalties, plus interest. Its expensive. It can be financialy devastating. But its not prison. You negotiate with the IRS. You work out a payment plan. You move forward with your business.

Criminal prosecution means federal charges, potential conviction, and incarceration. Wire fraud carries up to 20 years. Conspiracy carries 5 years. False returns carry 3 years per count. The Credit Reset defendants face multiple counts each.

The IRS has discretion about which cases to refer for criminal prosecution. High dollar amounts attract attention. Obvious fabrication attracts attention. Sophisticated schemes involving multiple parties attract attention. Businesses that cooperate early often stay on the civil side. Businesses that resist, lie, or wait to long end up facing criminal charges.

You dont control which side of the line you fall on. But you can influence it through early action.

What This Means For Your Business

If youve claimed the Employee Retention Credit – especialy through a promoter who promised “easy” qualification or charged contingency fees – you need to understand the exposure.

Heres the cascade that can destroy your business. You claimed ERC based on a promoters assurance you qualified. The promoter took 15% of your refund. Years later, the IRS reviews your claim. They determine you didnt actualy qualify. Now you owe 100% of the credit back – plus 20% accuracy penalties, plus potential 75% fraud penalties, plus years of interest. The promoter still has there fee. Your facing bankruptcy.

The numbers are stark. Over 84,000 returns have been partially or fully disallowed. Over 597,000 claims remain in IRS inventory waiting for review. The voluntary disclosure programs have ended. The withdrawal program remains open for unprocessed claims, but only until the IRS processes your claim first.

Clients come to Spodek Law Group after recieving disallowance letters or learning there promoter is under investigation. They genuinely beleived they qualified for pandemic relief. They discovered there promoter fabricated there eligibility. The question now is whether to address it proactivly or wait until the consequences multiply.

If your business claimed ERC, whether or not youve recieved IRS correspondence yet, you need to understand the stakes. Early intervention can sometimes resolve these matters without criminal exposure. Waiting until federal charges are filed means negotiating from the weakest possible position.

Todd Spodek has handled cases exactly like this. We understand how the IRS investigates ERC fraud, what evidence they use, and were the defenses might be. If your facing potential ERC liability, the question is whether to act now or wait until the enforcement wave reaches you.

Call us at 212-300-5196. The consultation is free. Loosing your business becuase you trusted the wrong promoter isnt something you have to accept.