The IRS Criminal Investigation department (IRS-CI) has partnered with the Justice Department to uncover and prosecute fraudulent activities related to the federal government’s COVID relief programs. To date, the IRS has conducted 840 investigations involving fraud amounts totaling more than $3.1 billion. The types of abuse include fraudulently obtained loans, ineligible tax credits and questionable payments meant for qualified workers, families and small businesses.
“Our special agents aim to do right by the American people and ensure that those who misused these funds face justice for the crimes they committed,” explained IRS-CI Chief Jim Lee.
The programs under scrutiny include:
- Paycheck Protection Program (PPP) Loans
- Employee Retention Credit
- Economic Injury Disaster (EIDL) Loans
- Economic Impact Payments
Examples of the criminal cases resulting from the IRS’s enforcement efforts are listed below.
U.S. v. Johnson: Marque Willard Johnson, of Tampa, Florida, pleaded guilty in a Florida federal to bank fraud and money laundering as part of a scheme to fraudulently obtain $544,900 in PPP and EIDL funds. Johnson falsely claimed he had large monthly payrolls and provided false and fraudulent representations concerning the financial condition of his companies and the intended purposes for the loans.
U.S. v. Thomas: Thirteen defendants were sentenced and another five pleaded guilty in a Georgia federal court for participation in a scheme to fraudulently obtain over $12 million in PPP and EIDL funds. They submitted at least 14 fraudulent loan applications. In the PPP loan applications, each business reported it had 60 employees and $300,000 in average monthly payroll expenses, when, in fact, most of the businesses existed on paper. To support these payroll figures, each business loan application was accompanied by a fraudulent IRS Form 941.
Justice Department’s Scorecard
The Department of Justice has formed Covid-19 Fraud Strike Force teams and regularly issues press releases under Covid Fraud News, which detail the many fraud investigations and cases. To date, the Agency’s efforts have resulted in criminal charges against over 1,500 defendants with alleged losses exceeding $1.1 billion, the seizure of over $1.2 billion in relief funds and civil investigations into more than 1,800 individuals and entities for alleged misconduct in connection with pandemic relief loans totaling more than $6 billion. Assistant Attorney General Kenneth A. Polite, Jr., of the Justice Department’s Criminal Division, explained, “As these cases demonstrate, we are unwavering in our determination to prosecute those who have defrauded relief programs meant to help struggling Americans during the pandemic.”
IRS Warns of Improper Employee Retention Credit Claims
Though less serious than fraud, the IRS is more closely scrutinizing employee retention credit claims. The IRS recently warned employers that third party advisors through advertising and direct solicitations are promising employers higher employee retention credits (ERCs) than they are entitled to, which can lead to an IRS audit and possible penalties and interest for the employer. Even CPAs are getting these solicitations. The problem firms often charge large upfront fees or a fee that is contingent on the amount of the refund.
These firms may misrepresent taxpayer eligibility and improperly compute the credit. For example, they may not inform taxpayers that wage deductions claimed on the business’s federal income tax return must be reduced by the amount of the credit. If an employer already filed an income tax return deducting the wages before it filed an employment tax return claiming the credit, the employer should file an amended income tax return to correct any overstated wage deduction.
The ERC is a refundable tax credit for businesses that continued paying employees during COVID shutdowns or that had significant declines in gross receipts from March 13, 2020 to December 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return due for those dates. The IRS has published on its website an ERC comparison chart for 2020 v. 2021 which explains the detailed rules.
During the pandemic, government agencies were focused on getting individual taxpayers and businesses the relief they needed to keep the economy going and tide people over until the pandemic was under control. The emergency nature of the disbursements meant that the IRS could not focus on ensuring eligibility up front, allowing bad actors to obtain covid relief benefits to which they were not entitled. Now, the IRS and the Justice Department are going back and investigating these programs in an attempt to recover any fraudulently obtained relief funds and to reverse any ineligible tax benefits. Given the scope of the covid relief programs, this effort is likely to last a long time.