Seven Individuals Charged in $600 Million COVID-19 Tax Credit Fraud Scheme
Federal authorities have unsealed a 45-count indictment against seven individuals accused of orchestrating a massive fraud scheme to steal over $600 million in COVID-19 relief funds. The defendants, all current or former New York residents, allegedly exploited the Employee Retention Credit (ERC) and the Sick and Family Leave Credit (SFLC) programs, designed to help struggling businesses during the pandemic, by filing thousands of fraudulent tax returns. The scheme, purportedly headquartered at a credit repair business in New York, resulted in the IRS paying out approximately $45 million before the fraud was detected.
The indictment alleges that the defendants, acting as tax preparers, filed over 8,000 false employment tax returns on behalf of themselves and their clients. These returns contained various fraudulent claims, including inflated SFLC amounts, double-dipping by claiming the same wages for both sick and family leave, and simultaneously claiming both SFLC and ERC for the same wages – all violations of the programs’ rules. Many of the businesses listed on the returns were allegedly inactive, lacked employees, had no physical presence, or failed to file required tax forms, further highlighting the fraudulent nature of the scheme.
The defendants are accused of profiting from the scheme by pocketing tax refund checks and charging clients fees based on the refunds received. They also allegedly recruited others into the scheme, offering a percentage of the fraudulently obtained funds as an incentive. To conceal their activities, the defendants reportedly avoided listing themselves as paid preparers on the returns and used Virtual Private Networks (VPNs) to mask their IP addresses. Their communication, according to the government, took place through text messages, phone calls, and a WhatsApp group, where they discussed strategies for deceiving the IRS.
The indictment further alleges that the defendants provided or facilitated the purchase of Employer Identification Numbers (EINs) for clients lacking them, often linking these EINs to shell companies or defunct businesses. When the IRS and Social Security Administration (SSA) detected discrepancies in the filed returns and requested further information, the defendants allegedly submitted false documentation. Adding to the charges, some defendants are also accused of submitting fraudulent Paycheck Protection Program (PPP) loan applications, complete with fabricated supporting information.
The brazen nature of the alleged fraud is underscored by the actions of one defendant, an aspiring rapper, who publicly posted a song boasting about exploiting government funds. Luxury goods seized from the alleged ringleader’s home, including designer items and high-end vehicles, are believed to have been purchased with the proceeds of the scheme. IRS-Criminal Investigation (CI) officials emphasized the egregiousness of the alleged crimes, highlighting how the defendants diverted funds intended to support struggling businesses for personal gain.
The defendants face a range of charges, including conspiracy to defraud the United States, wire fraud, and aiding and assisting in preparing false tax returns. If convicted, they could face substantial prison sentences, with potential penalties ranging from five years to 30 years depending on the specific charges. Attorneys for some of the defendants have issued statements denying the allegations and proclaiming their clients’ innocence, while others have not yet responded to requests for comment. Investigations by IRS-CI and the United States Postal Inspection Service (USPIS) are ongoing.
Understanding the COVID-19 Relief Programs and the Alleged Fraud
The charges in this case revolve around the exploitation of refundable tax credits, specifically the Employee Retention Credit (ERC), the Sick and Family Leave Credit (SFLC), and the Paycheck Protection Program (PPP). Refundable credits are particularly attractive to fraudsters because they can result in a direct refund even if the taxpayer has no tax liability.
The ERC was designed to encourage businesses to retain employees during the pandemic. Eligible employers could claim a credit based on qualified wages paid between March 12, 2020, and January 1, 2022. Eligibility generally required demonstrating either a government-mandated shutdown or a significant decline in gross receipts. The credit amounted to a percentage of qualified wages, up to a certain limit.
The SFLC provided tax credits to employers who paid wages for sick and family leave related to COVID-19. This credit covered wages paid for leave taken between April 1, 2020, and September 30, 2021. The credit was equal to 100% of the qualified wages paid for the leave.
The PPP offered forgivable loans to businesses, including sole proprietorships and self-employed individuals, to help maintain payroll and cover other essential expenses. Loan forgiveness was contingent on meeting specific criteria related to employee retention and the use of funds. Crucially, forgiven PPP loans were not treated as taxable income.
The defendants in this case allegedly exploited these programs by filing false claims for credits and loans they were not entitled to, thereby diverting funds intended for legitimate businesses struggling during the pandemic. The government’s case highlights the vulnerability of these relief programs to fraudulent activity and the importance of robust oversight and enforcement.
