Employee retention credit scams: Don't fall victim to an ERC scam!

The ERC scam problem was not an edge case. At the peak of promoter activity in 2022 and 2023, the IRS was receiving hundreds of thousands of Form 941-X amendments per month, many of them on partial-suspension theories that did not withstand basic scrutiny. The promoters advertised on radio, social media, and in direct mail — “your business probably qualifies,” “no one left behind,” “up to $26,000 per employee.” For businesses that signed without reviewing the eligibility analysis, the consequences are now arriving in the form of disallowance letters, penalties, and in some cases criminal referral. This chapter identifies the scam patterns, the red flags, and what to do if your claim came from one of them.

Our firm has represented businesses on both sides of the ERC scam problem — defending legitimate claims and helping businesses unwind promoter-filed claims before the IRS catches up. The legitimate ERC program was real; the promoter-driven ecosystem around it was not. For audit risk context, see Will the IRS Audit ERC?. For eligibility, see ERC Eligibility.

The Four ERC Scam Patterns

ERC scams followed four recurring patterns. Each has distinct red flags and distinct exposure profiles for the business that signed.

Aggressive Marketing”Every Business Qualifies”
OverclaimInflated Wages
Fabricated BasisInvented Government Orders
CriminalIdentity / Shell Fraud

Quick Reference

Jump to the scam pattern that fits: aggressive marketing, overclaim, fabricated basis, or criminal / shell. For the red flag checklist, see the promoter red flag lookup. If you suspect your claim was scam-driven, a 15-minute consultation is free.

1. Aggressive Marketing: “Every Business Qualifies”

The aggressive marketing pattern involves promoters who reached businesses through radio, television, social media, and direct mail with claims that nearly every business qualified for the credit. The underlying math was usually legitimate — the ERC statute is real, the dollar figures are real — but the eligibility theories were often thin or non-existent.

If this is you: You responded to an ad, signed a contingency-fee engagement, answered a questionnaire, and received a check. You may not have seen a detailed eligibility analysis. The question now is whether the underlying basis — the specific government order or the specific gross receipts decline — actually supported the credit you received.

Common marketing red flags that indicated the “every business qualifies” pattern:

• “No one left behind” or “every business qualifies” messaging. Eligibility is specific and quarter-by-quarter. Universal qualification is not how the statute works.
• Contingency fees of 20% to 30% of the credit. Circular 230 §10.27 restricts contingency fees for tax practitioners; promoter firms often operated outside the §10.27 framework, which is itself a red flag.
• Urgency marketing. “File before the deadline closes” without reference to the specific deadline or why it applied.
• Cold outreach. Unsolicited phone calls, text messages, and emails targeting small businesses.
• Short questionnaires instead of substantive analysis. A 5-question intake cannot produce a defensible eligibility file.
• Guarantees of qualification. “We qualify you or we don’t charge.” The IRS disqualifies; a promoter cannot.
• Refusal to identify the preparer. Some promoter firms filed 941-X amendments without identifying themselves, leaving the business as the signer on the return.

An important point for context: the IRS Office of Professional Responsibility and state bar authorities can pursue preparer discipline against promoters, but the business that signed the Form 941-X is still responsible for the position under penalty of perjury. Having been misled does not excuse the return.

How to Respond If You Signed Through Aggressive Marketing

1. Pull the engagement letter and the filed 941-X. Confirm what you signed and what was filed.
2. Request the eligibility analysis from the promoter. If one was not prepared, that is itself the answer.
3. Independently test the eligibility. Against Notice 2021-20, 2021-23, and 2021-49 requirements.
4. Evaluate voluntary withdrawal. Before an IRS documentation request arrives.
5. Report the promoter. Form 14242 reports abusive tax schemes; the IRS Office of Promoter Investigations reviews submissions.

2. Overclaim: Inflated Wages or FTE Counts

The overclaim pattern involves promoter calculations that inflated qualified wages, misapplied the FTE threshold, or ignored exclusions like owner wages and PPP overlap. Overclaim cases often have a legitimate eligibility basis but the credit amount is overstated.

If this is you: Your business had some eligibility — maybe a legitimate partial suspension or receipts decline. But the credit claimed is disproportionate to the payroll, to the period of eligibility, or to the specific wage exclusions that should have applied. The right response is usually a corrective amendment, not full withdrawal.

Common overclaim patterns:

• Owner wages included. Majority-owner wages and wages to family members related under IRC §267 do not qualify. IRS Notice 2021-49 was explicit on this.
• PPP double-counting. Wages used for PPP forgiveness cannot also support ERC. The overlap is the single most common overclaim.
• Incorrect FTE threshold. Treating the business as “small” when it should have been “large” (more than 100 FTEs in 2020, more than 500 in 2021) inflates qualified wages.
• Health plan expenses duplicated. The allocable health plan expense can be included but is frequently double-counted with the underlying wage.
• Non-service wage rule ignored for large employers. Large employers can only claim wages for employees not providing services.
• Non-qualifying quarters claimed. Q4 2021 is available only for recovery startups; other businesses’ Q4 2021 claims are invalid.
• Recovery startup cap ignored. $50,000 per quarter is a hard cap.

The short version is that overclaim cases can often be corrected through amendment rather than withdrawn entirely. A careful recompute identifies the legitimate portion and returns the excess. Doing this proactively — before IRS review — preserves credibility and reduces penalty exposure.

Overclaim Correction Procedure

1. Recompute qualified wages correctly. Exclude owners, family, and PPP wages.
2. Apply the correct FTE classification. Small vs. large based on 2019 count.
3. Identify the legitimate credit amount. The correct number based on the applicable rules.
4. File a corrective Form 941-X. Returning the excess to the IRS.
5. Consider a reasonable-cause statement. Reliance on a promoter is a §6664 defense if documented.

3. Fabricated Basis: Invented Government Orders

The fabricated basis pattern involves eligibility theories built on government orders that did not exist, did not apply, or did not cause the asserted suspension. This is the worst category of promoter work and the most likely to trigger civil fraud exposure.

If this is you: Your ERC eligibility memo cites government orders you cannot locate, attributes suspensions that did not happen, or claims causation without factual basis. This is not an overclaim that can be amended — it is a return that should not have been filed. Voluntary withdrawal or the IRS Voluntary Disclosure Program is usually the right path.

Common fabricated basis patterns:

• “OSHA guidance” treated as a government order. OSHA guidance is not a binding order. Notice 2021-20 requires a governmental order that restricts commerce, travel, or group meetings.
• CDC recommendations treated as government orders. Recommendations are not orders.
• Employee quarantines treated as suspensions. An individual employee’s illness or quarantine is not a government order on the business.
• General economic conditions characterized as orders. “Customers were staying home due to COVID” is not a government order.
• Supplier disruptions without order basis. The supplier must also have been under a qualifying government order.
• Orders from wrong jurisdictions. A New York restaurant cannot rely on a California order.
• Orders expired before the claimed quarter. An order in effect in Q2 2020 does not support a Q4 2020 claim.

Candidly, fabricated basis cases are the ones most likely to draw civil fraud penalty under IRC §6663 and criminal referral under §7201 or §7206. The business owner’s signature on Form 941-X under penalty of perjury is the evidence. Professional reliance defenses under United States v. Boyle apply civilly but are harder to sustain when the fabrication was obvious.

Did your ERC claim rely on “OSHA guidance,” “CDC recommendations,” or unspecified government orders? These are fabricated-basis red flags and the highest civil fraud risk category. Voluntary withdrawal or the Voluntary Disclosure Program is almost always better than waiting for the disallowance letter. Book a confidential consultation.

4. Criminal / Shell: The Prosecution Tier

The criminal / shell pattern involves outright fraudulent filings — using stolen identities, shell entities, fabricated payroll records, or fake business operations. These cases have produced DOJ indictments and multi-year prison sentences for the promoters behind them and for some of the nominee business owners.

If this is you: You have been contacted by IRS Criminal Investigation, received a target letter, or been named in a grand jury subpoena. Stop all communication. Do not answer questions. Do not produce documents. Call a criminal tax defense attorney immediately. The protections available before CI engagement are not available after.

Published DOJ Tax Division press releases document the criminal ERC caseload. Indictments have been filed against promoters who filed thousands of false claims for shell entities, tax preparers who filed fictitious wages, and business owners who knowingly certified non-existent operations. Individual defendants have received multi-year prison sentences and restitution orders in the millions.

The practical implication is that the criminal tier is narrow — most businesses that filed through promoters did not commit fraud, even if their claims are disallowed. But the line between civil overclaim and criminal fraud is the element of willfulness. Businesses that knowingly certified false information cross that line; businesses that were misled usually do not.

ERC Promoter Red Flag Lookup

The table below catalogs the most common promoter red flags and what they typically indicated about the underlying claim.

How Long Do Promoter-Filed Claims Remain at Risk?

The ERC-specific statute of limitations applies regardless of who prepared the claim.

• 2020 claims: 3 years from the later of 941 filing or April 15, 2024. Most now outside the window absent fraud.
• 2021 Q1 and Q2: 3 years — generally closed April 15, 2025. The special ERC statute never applied to these quarters.
• 2021 Q3–Q4: six years under OBBBA (July 2025). From the latest of filing, deemed filing, or the refund-claim date — most late-filed claims stay open into 2029–2030.
• Fraud: no statute. Knowing false basis reopens every year indefinitely.
• Erroneous refund suit: 2 years (5 for fraud) under IRC §6532(b).
• Preparer penalties under §§6700 / 6701. Separate statutes apply to promoters themselves.

The practical implication is that 2021 promoter-filed claims remain at risk for several more years. Voluntary withdrawal, when available, is almost always cheaper than waiting out the statute.

Promoter-Filed Claim Audit Rates

The IRS has publicly prioritized promoter-filed claims. The table below reflects the differential audit posture.

The Promoter Claim Escalation Pathway

Promoter-filed claims move through a predictable escalation sequence.

Documentation Request to Disallowance

A documentation request (Letter 6612) asks for the substantiation the promoter should have built into the file. Claims without contemporaneous eligibility memoranda, without specific government orders, or without the more-than-nominal analysis typically produce disallowance within 60 to 120 days.

Civil Penalty to Fraud Referral

Disallowance with fabricated-basis indicators can trigger civil fraud review under IRC §6663. Indicators include fabricated orders, knowingly false startup dates, or wages that did not exist. Once fraud is proposed, criminal referral under IRM Part 25.1.2 is possible.

Preparer Investigation

Separately from the business’s case, the IRS can pursue the promoter under IRC §§6700 (abusive tax shelter) and 6701 (aiding and abetting understatement). The DOJ can pursue criminal charges against the promoter under §7206. Businesses may be asked to cooperate as witnesses in these proceedings.

The practical implication is that the cooperation value of the business in a promoter investigation is sometimes a factor in plea or settlement posture for the business itself. Early voluntary disclosure and cooperation can reduce both civil and criminal exposure.

The First 48 Hours After Recognizing the Scam Pattern

The sequence below reflects what we recommend when a business recognizes it was filed through a promoter.

1. Do not contact the IRS directly. Counsel first.
2. Pull the engagement letter and 941-X. Confirm what was filed.
3. Identify the asserted eligibility basis. Which pillar, which quarter, which order.
4. Independently test the basis. Against the statute and Notice 2021-20.
5. Evaluate voluntary withdrawal eligibility. IRS ERC Claim Withdrawal program for unpaid claims.
6. Evaluate Voluntary Disclosure Program eligibility. For paid claims with fraud exposure.
7. Engage specialized counsel. Attorney-client privilege and criminal-adjacent analysis.

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Brotman Law has been recognized by Inc. Magazine as one of California’s fastest-growing law firms. We have guided businesses through the full spectrum of ERC scam recovery — from quiet corrective amendments for honest overclaims to voluntary withdrawal for fabricated claims to criminal defense for taxpayers named in DOJ proceedings. Our office is based in San Diego, and we represent clients throughout California and nationwide.

The ROI Question

Voluntary withdrawal or voluntary disclosure is almost always cheaper than audit, and substantially cheaper than civil fraud or criminal defense. For any promoter-filed ERC claim above $100,000, independent review and, where appropriate, voluntary withdrawal costs a fraction of the worst-case exposure. The window for these options closes when the IRS initiates contact.

ERC Claim Under Scrutiny?

The IRS has been aggressively auditing Employee Retention Credit claims, and many businesses that received credits through third-party promoters are now facing disallowance, repayment demands, or audit notices. If you’re uncertain about your claim’s defensibility or have received an IRS inquiry, we can review what you have and identify the options.

Review My ERC Claim →    Or call: (619) 378-3138

When to Engage an Attorney for ERC Scam Recovery

Not every promoter-filed claim requires counsel. A business with a legitimate underlying basis and a modest overclaim can often correct through its existing CPA. The situations below are the ones where attorney involvement is essential.

• Fabricated-basis claim. Voluntary disclosure and criminal-adjacent analysis require attorney-client privilege.
• Claim above $250,000. Exposure justifies specialist counsel.
• Civil fraud penalty proposed. IRC §6663 defenses are technical.
• IRS Criminal Investigation contact. Criminal defense counsel is mandatory.
• Promoter refuses to produce eligibility file. Independent reconstruction and reporting.
• Identity or shell entity exposure. Criminal tier.
• Witness subpoena in promoter investigation. Cooperation strategy required.

Any of the above apply to your situation?

A 15-minute consultation is free. We will review the filing, identify the exposure, and recommend a path. If the right answer is voluntary withdrawal, we will tell you.

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