What Is the False Claims Act?

The History and Purpose of the False Claims Act

The False Claims Act is sometimes called the "Lincoln Law" because President Abraham Lincoln signed the original version in 1863. Congress enacted it in response to widespread fraud by defense contractors during the Civil War — suppliers selling the Union Army rotten meat, defective rifles, and sick horses at full price. The original statute empowered private citizens to sue fraudulent contractors on the government's behalf, sharing in any recovery as an incentive to come forward.

The statute fell into relative disuse for most of the twentieth century. Congress revived and substantially strengthened it in 1986 under the Reagan administration, responding to mounting defense procurement fraud in the defense industry. The 1986 amendments raised damages, strengthened qui tam incentives, and clarified the scienter standard. Subsequent amendments in 2009 and 2010 further expanded the statute's reach — particularly the 2009 Fraud Enforcement and Recovery Act (FERA), which broadened the definition of "claim" to cover any false statement made in connection with a claim, including situations where the government's funds pass through an intermediary (such as a private lender administering a government-backed loan).

That 2009 expansion has significant implications for PPP loan fraud cases today.

The Text of the False Claims Act: What It Actually Says

The statute covers seven categories of conduct, each actionable independently:

1. Presenting a false or fraudulent claim for payment (§ 3729(a)(1)(A)). The core offense. Submitting a payment request you know to be false.
2. Making or using a false record or statement material to a false claim (§ 3729(a)(1)(B)). Creating or using a false document that causes the government to pay a false claim.
3. Conspiring to violate the FCA (§ 3729(a)(1)(C)). Agreeing with others to commit any FCA violation.
4. Delivering less than what the government pays for (§ 3729(a)(1)(D)). Receiving payment for goods or services and delivering less than what was certified.
5. Making a false document to get a false claim certified (§ 3729(a)(1)(E)). Fraudulently securing certification.
6. Buying government property from an unauthorized person (§ 3729(a)(1)(F)). Buying government property from an officer who cannot sell it.
7. Making or using a false record to avoid repaying money owed to the government (§ 3729(a)(1)(G)) — the "reverse false claims" provision. Using false records or statements to decrease what would otherwise be an obligation to pay the government.

For ERC and PPP purposes, clauses (A), (B), and (C) — false claims, false records, and conspiracy — are the primary theories the government uses.

The "Knowingly" Standard: What Level of Intent Does the FCA Require?

One of the most misunderstood aspects of the FCA is the intent requirement. Many people assume the FCA requires proof of intentional fraud — that the defendant knew the claim was false and deliberately submitted it anyway. The statute's actual standard is significantly broader.

Under 31 U.S.C. § 3729(b)(1), "knowingly" means the person:

1. Has actual knowledge of the information; or
2. Acts in deliberate ignorance of the truth or falsity of the information; or
3. Acts in reckless disregard of the truth or falsity of the information.

Critically, the statute expressly provides that "no proof of specific intent to defraud is required." Reckless disregard — the lowest of the three standards — means acting with a conscious disregard of a substantial risk that a claim is false. Courts have found reckless disregard in cases where a company used methodology that a reasonable person would recognize might be incorrect, failed to verify facts before submitting a claim, or ignored warning signs of incorrectness.

This standard matters enormously in the ERC and PPP context. A business that used an ERC promoter who applied a cookie-cutter eligibility analysis across hundreds of clients — never reviewing the specific government orders affecting each business, never examining individual payroll records, simply generating identical eligibility memos — may be found to have acted with reckless disregard even if the business owner did not personally know the claim was invalid. The question courts ask is: what should you have known, and what steps should you have taken to verify the claim's legitimacy?

False Claims Act Penalties: How the Numbers Work

The FCA's penalty structure is one reason False Claims Act exposure can be so disproportionate to the underlying disputed amount. Understanding the math is important for anyone assessing their risk.

The "number of false claims" is determined by how many separate claim submissions the government characterizes as false. For ERC, each Form 941-X is typically one claim. For a business that filed amended payroll returns across multiple quarters and multiple entities, the count can reach into the dozens or hundreds. This is why per-claim penalty exposure often dwarfs the actual amount at issue.

Penalty inflation adjustment: The per-claim penalties are adjusted annually for inflation under the Federal Civil Penalties Inflation Adjustment Act. The amounts stated here ($13,946–$27,894) are current as of 2024. They increase slightly each year.

The Qui Tam Provisions: How Private Citizens Sue on the Government's Behalf

The FCA's qui tam provisions are what make the statute particularly powerful — and particularly dangerous for businesses that have received federal funds. "Qui tam" comes from the Latin qui tam pro domino rege quam pro se ipso in hac parte sequitur — "who sues on behalf of the king as well as for himself." The idea is centuries old; the FCA implementation is distinctly modern.

If you are named as a defendant in a qui tam suit — not the relator filing it — see our qui tam defense attorney page for a complete breakdown of the defendant's procedural position and available defenses.

Under 31 U.S.C. § 3730(b), any private individual with knowledge of an FCA violation — called a "relator" — can file a civil complaint on behalf of the United States. The relator files the complaint under seal (meaning the defendant has no notice) and serves it on the DOJ, which then has 60 days (routinely extended to months or years) to investigate.

If the government intervenes and wins or settles the case, the relator receives 15% to 25% of the recovery. If the government declines to intervene and the relator prosecutes the case independently, the relator receives 25% to 30%. In large ERC or PPP fraud cases, the relator's share of a multi-million dollar recovery can be substantial — creating strong financial incentive for employees, competitors, accountants, and ERC promoters to report suspected violations.

Who Files Qui Tam Complaints?

In the ERC and PPP context, qui tam relators have included:

• Former employees who processed payroll and knew that the employee headcount or wage amounts in ERC claims were inflated
• ERC promoters and mills cooperating with the government after their own investigations began, providing information about client businesses in exchange for reduced exposure
• Competing businesses that were aware a competitor filed ERC or PPP claims for periods when the competitor was clearly not eligible
• Lenders who processed PPP loans and observed irregularities in the forgiveness documentation
• Accountants and bookkeepers who left a client's employ and had knowledge of how funds were used

The qui tam seal period means you may already be the subject of a filed FCA complaint without knowing it. If you have reason to believe any of the above applies — a disgruntled former employee, a terminated accountant, an ERC promoter who has since been indicted — the appropriate response is to evaluate your exposure now, before the complaint is unsealed.

Materiality: The Escobar Standard

The Supreme Court's 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar clarified that FCA liability requires proof of materiality — meaning the false statement must actually have affected the government's decision to pay the claim.

The Court described materiality as having "a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." Critically, materiality is demanding. Evidence that the government continued to pay similar claims after learning of the alleged defect is strong evidence of non-materiality. Courts have dismissed FCA claims where the government knew about the compliance issue but paid anyway — suggesting the issue did not actually influence payment decisions.

In ERC enforcement, materiality arguments arise when a business can demonstrate that the government paid virtually identical claims from thousands of similarly situated businesses. The breadth of ERC payments — hundreds of thousands of claims across the country — provides some foundation for materiality defense in cases where the alleged defect is methodological rather than outright fabrication.

The FCA and the ERC: The Specific Intersection

The Employee Retention Credit was administered as a payroll tax refund — businesses filed amended Forms 941-X with the IRS claiming refundable credits against their employment tax liability. The IRS issued refund checks, often for substantial amounts, with limited pre-payment review.

The FCA enters the picture when the DOJ determines that an ERC claim was fraudulent. The government's position in these cases is that each amended Form 941-X (and in some cases each original Form 941 that incorporated ERC withholdings) is a "claim" for purposes of the FCA. For a business that filed ERC claims across multiple quarters and multiple entities, the resulting per-claim penalty exposure can be enormous relative to the actual credit claimed.

The primary FCA theories in ERC cases are:

• Fabricated government order suspension. The government alleges that the business was not actually subject to a qualifying government order causing a full or partial suspension of operations, and that the "government order" cited was inapplicable, trivially impactful, or manufactured by the promoter.
• Inflated payroll numbers. The wages claimed as qualifying ERC wages were higher than the business actually paid — either through overstating headcount or overstating hourly rates.
• Ineligible wages. The credit was claimed on wages paid to owners, related parties, or majority shareholders — categories specifically excluded from the ERC.
• Fictitious employees. The most severe cases involve businesses claiming ERC for employees who did not actually exist — essentially fabricating the entire payroll basis for the credit.
• Double-dipping. The same wages were used to support both PPP loan forgiveness and the ERC — an explicit statutory prohibition under the CARES Act.

For businesses with legitimate ERC claims that nonetheless received promoter-prepared filings with methodological weaknesses, the defense posture differs substantially from cases involving outright fabrication. The documentation of the underlying business operations — the actual government orders, the actual payroll records, the actual business impact — is the foundation of the defense.

For a complete analysis of ERC enforcement defense options, see our False Claims Act defense practice page and our ERC audit defense page.

The FCA and PPP Loans: How the 2009 Amendment Changed the Exposure Landscape

PPP loans were administered through private lenders under SBA guarantees. The FCA's original text covered claims submitted directly to the government. The 2009 FERA amendment expanded the definition of "claim" to include any request for payment from "any contractor, grantee, or other recipient if … any portion of the money or property requested or demanded is to be spent or used on the Government's behalf." This sweeps in PPP loan applications submitted to private lenders that were backed by SBA guarantees — which is why PPP fraud can constitute an FCA violation even though the check came from a bank rather than directly from the Treasury.

FCA liability in the PPP context typically arises from:

• False certifications of employee headcount or average monthly payroll on the original loan application
• False certifications of fund use on the forgiveness application (claiming all funds went to payroll when they did not)
• Obtaining multiple PPP loans from different lenders for the same period
• Receiving PPP funds for employees who were not actually on payroll

If you have PPP or ERC exposure, call (619) 378-3138 for a confidential consultation.

The FCA Enforcement Apparatus: Who Investigates and Prosecutes

FCA civil enforcement is led by the Department of Justice Civil Division's Commercial Litigation Branch, Fraud Section. In the ERC and PPP context, the DOJ has worked closely with:

• The COVID-19 Fraud Enforcement Task Force — a multi-agency task force established in 2021 and expanded through 2024 that coordinates civil and criminal enforcement across the IRS, DOJ, SBA, FBI, and other agencies
• The IRS Criminal Investigation division, which investigates criminal tax fraud and has referred hundreds of ERC cases for prosecution
• The SBA Office of Inspector General, which investigates PPP and EIDL fraud
• Individual U.S. Attorney's Offices, which prosecute both civil FCA and parallel criminal cases

When a qui tam complaint is filed, the Civil Division typically coordinates with the local U.S. Attorney's Office to conduct the investigation. If the facts support criminal charges alongside the civil FCA case, the criminal and civil matters can proceed simultaneously — with different DOJ attorneys handling each, but coordinating to ensure the civil investigation does not compromise the criminal case.

FCA Settlement: How Most Cases Resolve

The large majority of FCA cases settle before trial. The DOJ prefers settlement because it provides certainty, avoids the cost and delay of litigation, and generates recoveries that can be publicized to deter future violations. Defendants prefer settlement because the penalty structure of the FCA means that a trial loss could result in liability far exceeding any reasonable settlement amount.

FCA settlements typically include:

• A monetary payment equal to the government's actual damages plus a negotiated multiplier (often between 1.5× and 2.5×, rather than the full 3× treble damage amount)
• Per-claim penalties reduced or waived as part of the settlement
• In some cases, a corporate integrity agreement requiring compliance improvements
• In cases involving individual misconduct, personal liability separate from any corporate settlement

Settlement negotiations in FCA cases involving ERC and PPP typically center on: (1) whether the underlying conduct was genuinely fraudulent or a good-faith methodology dispute; (2) the actual amount the government lost versus the nominal credit claimed; (3) the relator's share and the relator's willingness to settle; and (4) whether a parallel criminal investigation is ongoing and how settlement affects criminal exposure.

What to Do If You Have False Claims Act Exposure

If you believe you may have FCA exposure — because of how your ERC claim was prepared, because of who prepared your PPP loan forgiveness application, because a former employee may have filed a qui tam complaint, or because you received a government inquiry — the steps to take are:

1. Retain defense counsel immediately. Do not speak to government investigators, produce documents, or respond to any government inquiry without counsel. Everything you say can be used in both the civil and criminal proceedings.
2. Do not destroy documents. Once litigation is reasonably foreseeable — including when you have reason to believe a qui tam may have been filed — a litigation hold applies. Destroying documents at this stage can add obstruction charges to your exposure.
3. Conduct an internal investigation. With counsel, review the underlying ERC or PPP claims — every worksheet, eligibility memo, payroll record, and government order documentation — to understand exactly what the government will see and where the weaknesses are.
4. Evaluate proactive disclosure options. In some circumstances, proactive disclosure to the government — before a qui tam complaint is unsealed — can result in substantially reduced liability. This is a strategic decision that requires careful evaluation of the facts, the likelihood a complaint has already been filed, and the relative strength of the government's case.
5. Coordinate ERC administrative and FCA defense strategies. If you are simultaneously under an IRS ERC audit and potentially subject to an FCA investigation, your responses to the IRS must be coordinated with your FCA defense posture. These are different proceedings with different standards, but the same documents and statements appear in both.

For a fuller discussion of defense strategies, see our False Claims Act defense attorney page.