Unemployment Insurance Fraud: Understanding the Risks

Unemployment insurance (UI) fraud costs taxpayers tens of billions of dollars per year—if not more. This includes fraud perpetrated by both individuals and organizations. Even if the dollar amount involved in any one particular case may be relatively low, the costs of unemployment insurance fraud add up, and this means that combating unemployment insurance fraud is a top priority for state and federal authorities across the United States. 

With this in mind, if you are under investigation for unemployment insurance fraud (or if you are concerned that you may become the target of an investigation), what do you need to know? More importantly, what do you need to do to protect yourself? Keep reading to learn about the risks involved in these cases and the options you may have available from the federal defense lawyers at Oberheiden P.C.

Recent Events Have Led Federal Authorities to Prioritize Unemployment Insurance Fraud Enforcement 

While unemployment insurance fraud is largely a state-level concern, the federal government supplements states’ coverage in a variety of circumstances, and the federal government generally has an interest in uncovering, prosecuting, and preventing financial crimes that impact taxpayers. Additionally, some recent events have led federal authorities—including the U.S. Department of Justice (DOJ)—to specifically prioritize unemployment insurance fraud enforcement. 

The first of these events was the COVID-19 pandemic, which led to a sharp increase in fraudulent claims and overwhelmed the primary agency responsible for reporting fraud in real time. According to estimates from the U.S. Government Accountability Office (GAO), “fraud accounted for 11-15% of the total amount of [UI] benefits paid during the pandemic.” As the GAO also reports: 

“In that time frame [from March 2020 to May 2023], the Department of Labor provided funding to states to help prevent, detect, and investigate fraud and recover fraudulent payments. States reported finding about $55.8 billion in total overpayments—$5.3 billion of which were fraudulent.”

This led the GAO to place the unemployment insurance system on its High Risk List, which identifies, “programs and operations with serious vulnerabilities to waste, fraud, abuse, or mismanagement, or in need of transformation.”

As a result, the federal government was already on high alert when the Trump administration’s efforts to reduce federal spending led to widespread layoffs in both the public and private sectors in early 2025. The unemployment rate increased from 3.6% last May to 4.2% in May 2025, putting additional pressure on every government agency tasked with processing and verifying claims. While the unemployment rate has leveled off recently, this reflects a mix of job growth in certain industry segments and job loss in others, creating conditions that can lead to unexpected payments in the claims system. This means that unemployment claims also remain high—and this presents an opportunity for both individuals and companies to attempt to game the system while state and federal authorities are focused on processing claims as efficiently as possible. 

Federal Authorities Are Targeting Identity Theft and Other Forms of Unemployment Fraud  

But, while state unemployment insurance authorities may be predominantly focused on efficiently processing claims, both state and federal authorities are continuing to target fraud as well. At the federal level, this includes the DOJ, the U.S. Department of Labor (DOL), and the Internal Revenue Service (IRS), among others. All three of these federal authorities have issued warnings about the risks of unemployment insurance fraud—and they have all made clear that they are prepared to take action when warranted. 

Crucially, this includes targeting not only employees (or individuals claiming to be employees) who attempt to illegally receive unemployment benefits, but also targeting employers. On the employee side, federal authorities have highlighted their efforts to target fraudulent practices such as: 

• Using unemployment identity theft to submit an unemployment claim filed on behalf of another individual who is eligible to file for benefits;
• Redirecting unemployment benefit payments intended for an authorized recipient to someone else;
• Filing a claim despite being ineligible to do so (including submitting false or misleading information in support of an application for unemployment insurance benefits); and, 
• Misrepresenting eligibility to file a fraudulent claim or continue receiving unemployment insurance benefits.

On the employer side, federal authorities are scrutinizing companies’ practices involving: 

• Establishing fictitious employer accounts to enable fraudulent unemployment insurance claims by individuals (who may or may not be employees);
• Transferring employees to another business entity in order to reduce or avoid unemployment insurance liability (a practice referred to as “dumping”);
• Acquiring another business for the purpose of “dumping” employees into the business in order to reduce or avoid unemployment insurance liability; and,
• Taking other steps to either illegally avoid unemployment insurance liability or facilitate fraudulent unemployment insurance benefit claims.

Federal authorities encourage employees, former employees, and other individuals to report suspected unemployment identity fraud and other forms of unemployment insurance fraud, as these reports can trigger high-risk investigations. As discussed in greater detail below, unemployment insurance fraud is a serious offense that can carry substantial penalties—and, when facing state or federal scrutiny, avoiding unnecessary consequences requires experienced and strategic legal representation. 

Allegations of Unemployment Insurance Fraud Can Present Substantial Risks 

For individuals and businesses targeted in unemployment insurance fraud investigations, the risks can be substantial. As the DOL explains: 

“All states are required to assess a penalty of not less than 15% of the amount of the fraudulent payment. Other penalties under state unemployment insurance laws generally include criminal prosecution with fines and/or incarceration; required repayment of fraudulently collected benefits; forfeiting future income tax refunds; and/or permanent loss of eligibility for unemployment compensation. Commission of unemployment benefit fraud may also be prosecuted by the U.S. Department of Justice in federal courts under 18 U.S.C § 1341 or other appropriate federal statutes.”

With the DOJ, DOL, and IRS all focused on combating UI fraud, the risk of facing federal scrutiny in these cases is a growing concern. Under 18 U.S.C. Section 1341 (the federal mail fraud statute), potential penalties include fines of up to $250,000 ($500,000 for businesses) and up to 20 years of federal imprisonment. These penalties apply on a per-offense basis, meaning that if an individual or business is accused of engaging in multiple attempts to defraud an unemployment insurance program, the total fines involved could easily climb into the millions of dollars. 

Along with 18 U.S.C. Section 1341, prosecutors at the DOJ may choose to pursue charges under several other federal statutes as well. Some examples of other potential charges (and penalties) include: 

• 18 U.S.C. Section 1343 (Wire Fraud) – Fines of up to $250,000 ($500,000 for businesses) and up to 20 years of federal imprisonment.
• 18 U.S.C. Section 1349 (Attempt and Conspiracy) – The same penalties as those prescribed for the offense that was the subject of the attempt or conspiracy.
• 18 U.S.C. Section 1956 (Money Laundering) – Fines of up to $500,000 or twice the value of the property involved (whichever is greater) and up to 20 years of federal imprisonment.
• 26 U.S.C. Section 7201 (Tax Evasion) – Fines of up to $100,000 ($500,000 for businesses) and up to five years of federal imprisonment.

Once again, these are just examples. In unemployment insurance fraud cases, federal prosecutors will not hesitate to pursue all viable charges—and they will not hesitate to seek the maximum available penalties in court. 

What You Should Do if You Are Under Investigation for Unemployment Insurance Fraud 

With all of this in mind, what should you do if you are under investigation for unemployment insurance fraud? 

If you have been contacted by state or federal authorities, regarding an unemployment insurance benefits claim or because of discrepancies tied to a 1099 G tax form, you need to be very careful. As discussed above, this is a high-risk scenario, and you need to make informed decisions to protect yourself (or your company), including whether to voluntarily provide additional tax filing information when under investigation. This starts with engaging a defense team that can advise you and communicate effectively with the authorities investigating unemployment fraud on your behalf. 

When it comes to defending against a high-stakes state or federal law enforcement investigation, there are a variety of potential strategies that targets can use to mitigate their risk. With that said, every case calls for an informed and custom-tailored approach. Generally, it will make sense to focus on targeting a resolution that avoids criminal charges—whether that means convincing investigators to drop the inquiry or negotiating a deal with the prosecutors assigned to your case. 

But, fighting the government’s allegations in court will be the best option in some cases as well. If you cannot avoid criminal charges (either because it is too late or because prosecutors are intent on making an example out of your case), then you will need to work closely with your defense counsel to fight your charges in court. In any case, you need experience on your side, and your first step should be to schedule a free and confidential consultation with an experienced unemployment insurance fraud defense attorney.  

Need Help? Contact the Unemployment Insurance Fraud Defense Lawyers at Oberheiden P.C.

At Oberheiden P.C., we defend companies and individuals accused of unemployment insurance fraud by the DOJ, DOL, IRS, and other authorities. If you need experienced legal representation, we encourage you to contact us right away. To speak with one of our senior unemployment insurance fraud defense lawyers in confidence as soon as possible, call us at 888-680-1745 or tell us how we can reach you online now.