Even IRS Agents Aren’t Immune from Scrutiny for COVID-19 Relief Fraud

The Internal Revenue Service (IRS) and its Criminal Investigation Division (IRS CI) are continuing to prioritize the investigation of COVID-19 relief fraud. This includes fraud under the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program, as well as fraudulent use of the limited-time Employee Retention Credit (ERC).

With a recent report from the U.S. Small Business Administration (SBA) suggesting that the cost of fraud under the PPP and EIDL program may exceed $200 billion, this isn’t likely to change any time soon. Even though the PPP, EIDL program and ERC have all run their course, the scope of COVID-19 relief fraud is keeping the government’s response in the spotlight. All individuals and businesses that received (or even unsuccessfully applied for) pandemic-related loans and credits are potentially at risk, with criminal penalties being on the table in some cases.

Even the IRS’s own agents aren’t immune from scrutiny.

In May, IRS CI announced charges against a former IRS revenue officer who is accused of playing a central role in an alleged multi-million-dollar PPP loan fraud scheme. This follows a press release from the U.S. Department of Justice (DOJ) last October, which announced charges against five current or former IRS employees who were accused of fraudulently obtaining PPP and EIDL loans.

Familiar Allegations: Submitting Falsified Documents to Obtain Pandemic Relief Loans

Both of these cases involve allegations that are similar to those that we have seen in several other PPP and EIDL fraud enforcement actions: In each case, the federal government alleges that the defendants submitted falsified documents in support of PPP and/or EIDL loan applications. While the defendants in both of these cases were successful in obtaining loans under one or both programs, other recent enforcement actions have demonstrated that IRS CI and the DOJ are targeting unsuccessful loan applicants as well.

IRS CI’s press release states that the revenue agent involved conspired with his brother and two other defendants to submit fraudulent PPP loans on behalf of four separate business entities. In the press release, IRS CI further alleges that “[a]lthough each of the companies’ PPP loan applications certified that each company had between 19 and 49 employees and approximately $150,000 to $430,000 in monthly payroll, in reality, all four companies were little more than shell companies, with no payroll expenses.”

While the DOJ’s press release contains less detail, it similarly alleges that the defendants in that case “obtained funds under the PPP and EIDL Program by submitting false and fraudulent loan applications that collectively sought over $1 million.”

Given that the loan applications in both cases were fraudulent (as alleged), it is not surprising that the allegations in both cases also include using the defendants’ loan proceeds for ineligible personal expenses. Under both the PPP and the EIDL program, loan proceeds were only allowed to be used for working capital and normal operating expenses—and the limitations were even stricter under the PPP. IRS CI’s press release includes allegations that the defendants used their PPP loan proceeds for “significant personal expenses, personal credit cards, personal investments, and distributions to their family members,” while the DOJ’s press release alleges that the defendants in that case used their PPP and EIDL loans for “cars, luxury goods, and personal travel, including trips to Las Vegas.”

The Continuing Risk of Facing Civil or Criminal Prosecution for COVID-19 Relief Fraud

Both of these recent cases are criminal in nature. The defendants are facing charges including wire fraud, money laundering, bank fraud, conspiracy to commit bank fraud, and aiding and advising in the filing of false tax returns. These crimes carry substantial fines as well as prison sentences ranging from three to 30 years. Other targets of COVID-relief fraud investigations have faced similar charges, and many individuals are currently serving prison time for pandemic-related fraud.

Even if a fraud-related inquiry is civil in nature, the consequences can still be severe. For example, businesses that improperly claimed the ERC can face substantial liability for back taxes, interest and penalties—even if they did so inadvertently. Additionally, even if an inquiry is civil in nature initially (i.e., in the case of an IRS audit), evidence uncovered during the inquiry could still trigger a referral to IRS CI or the DOJ.

As a result, business owners and other individuals that obtained (or even applied for) government-backed loans and tax credits during the COVID-19 pandemic need to be careful. Those that have not done so already should reassess their eligibility, and if they have any concerns, they should consult with experienced legal counsel as soon as possible. Numerous issues can lead to civil enforcement action or criminal prosecution—and, as noted above, enforcement in this area remains a top federal law enforcement priority.

Some examples of issues that have the potential to expose business owners and other individuals to civil or criminal liability include:

• Submitting false information in support of a PPP or EIDL loan application
• Submitting fraudulent documents (i.e., fake tax returns) in support of a PPP or EIDL loan application
• Inflating payroll expenses in order to claim the ERC
• Using PPP or EIDL loan proceeds for unauthorized purposes
• Fraudulently certifying eligibility for PPP loan forgiveness

Again, these are just examples. With the IRS and other federal agencies focusing on pandemic-related fraud, any violations have the potential to trigger intensive scrutiny and vigorous prosecution. While inadvertent mistakes may not justify criminal charges, they can still lead to civil enforcement (and allegations of criminal intent are still a very real possibility). Taxpayers that are not yet facing scrutiny have options available to mitigate their risk, but choosing the right option requires a clear understanding of the facts and potential allegations at hand.

Speak with a Federal Tax Defense Lawyer at Brown Tax, P.C.

We represent individuals and businesses in high-stakes tax controversies, including civil and criminal COVID-19 relief fraud cases. If you need to speak with a lawyer in confidence, we invite you to call 817-870-0025 or contact us online to arrange an initial consultation.