ERC Fraud Watch: Fake Businesses and Employees

July 19, 2023 by Max Shenker

IRS Criminal Investigations published a press release on May 26, 2023, describing criminal charges brought in an ERC fraud case. “According to the indictment that was returned on May 11 and unsealed today, from November 2020 to April 2022, Gregory made false claims to the IRS for the payment of nearly $65.4 million in tax refunds for a purported Beverly Hills-based farming-and-transportation company named Elijah USA Farm Holdings.”

Court documents reveal that the defendant applied for an employer identification number for a new entity on August 28, 2020. Attorneys for the government noted that “For tax years 2020 through 2022, Elijah Farm had no substantial business operations or employees other than defendant GREGORY and did not pay substantial [Federal Tax Deposits] to the IRS.”

This fact pattern, in which a new entity was created during the pandemic and for which ERC was subsequently filed, appears to be a significant red flag for identifying ERC fraudsters.

IRS-CI is alleging a similar pattern in a complaint filed July 18, 2023, in the United States District Court Middle District of Louisiana. According to court documents, the government is alleging that “From at least April 2020 through at least March 2023, within the Middle District of Louisiana and elsewhere, Damian Raby and others prepared and presented to the IRS certain tax forms, including Forms 941 and forms for the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund (Form 941-X), claiming the ERC on behalf of several business entities. These entities either did not exist during the period of eligibility or did not have any legitimate business activities at the time of eligibility for the ERC. The Forms 941 and Forms 941-X submitted to the IRS contained material fraudulent representations. These fraudulent claims for COVID-related tax credits often resulted in refunds being mailed to the fraudulent businesses.” The complaint goes on to detail the creation of three entities for the purpose of fraudulently claiming ERC. In these instances, IRS-CI found that the entities were created after the period ERC qualified wages were supposed to have been paid:

“The combination of the issuance of the EIN by the IRS in August 2022 and the registration of CW Furniture with the Louisiana Secretary of State in January 2023 indicates that CW Furniture was not conducting business during the period of eligibility, specifically March 13, 2020, through December 31, 2021, to qualify for the ERC. Furthermore, the lack of records of CW Furniture paying any employees or non-employee contractors or workers during the eligibility period indicates that it is not eligible for the refundable ERC.”

The government found a different scheme described in an indictment in the United States District Court for the District of Colorado. In a case filed June 22, 2022, the Grand Jury found that, in combination with fraudulent PPP and EIDL claims, the defendant also filed false Forms 7200 claiming ERC. In this case, the entity was real, but the employees were not. On June 26, 2023, one of the defendants pleaded guilty and the plea documents explain the scheme:

“In the fall of 2021 Ms. Washington filed a number of Form 7200s on behalf of 5 other entities or individuals. On or about October 8, 2021, Ms. Washington prepared four Form 7200s on behalf of Kemett LLC for the last three quarters of 2020 and the first quarter of 2021. On each of the Form 7200s it was represented that Kemett LLC paid $45,000.00 in wages paid to 3 employees of Kemett, LLC. Ms. Washington showed the forms to the defendant and asked him to sign them so that Kemett LLC could obtain a payment from the IRS of $15,000.00 for each Form 7200 submitted. The defendant knew that Kemett LLC did not employ 3 people during the quarters listed on the Forms 7200 and knew that Kemett LLC did not pay those employees a total of $45,000.00 as wages. Those representations were false, and he knew they were false. He signed the forms ‘under the penalty of perjury,’ and the forms were faxed to the IRS, an agency of the United States government.”

Previous ERC Fraud Watch Posts:

ERC Fraud Watch: IRS Tax Tips, December 15, 2022

ERC Fraud Watch: IRS and President Target COVID-19 Relief Fraud, March 7, 2023

ERC Fraud Watch: Dirty Dozen and Stolen ERC Checks, April 7, 2023

The ERC Fraud Spectrum, May 25, 2023

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