Accused of Inflating Payroll Costs on PPP Application

So you received a letter—maybe from the SBA, maybe from your PPP lender, maybe from the FBI or Department of Justice—alleging that you inflated your payroll costs on your Paycheck Protection Program loan application. Your stomach dropped when you read it. The letter might say you claimed more employees than you actually had, or that you overstated your monthly payroll expenses, or that the payroll figures you submitted dont match your tax documents. Now your being investigated for PPP fraud, and the consequences being described are TERRIFYING—potential criminal charges for bank fraud or wire fraud (carrying up to 30 years in prison), civil False Claims Act liability (with penalties up to three times the loan amount), loan forgiveness denial, and demands that you repay the full PPP loan immediately. You might have made an honest mistake in calculating payroll costs, or maybe you were overly aggressive in interpreting what could be included, or maybe your accountant made errors—but now the government is treating this like deliberate fraud, and your facing life-destroying consequences.

Here’s what you need to know: **Inflating payroll costs on a PPP application is one of the most common fraud allegations the government is pursuing, because payroll costs were the foundation for how PPP loan amounts were calculated—you could borrow up to 2.5 times your average monthly payroll costs, so overstating payroll by even 20-30% could result in tens of thousands of extra dollars in loan proceeds**. The government is aggressively investigating these cases through DOJ fraud prosecutions, SBA Office of Inspector General audits, lender reviews during forgiveness processing, and whistleblower complaints. Intentionally inflating payroll to get a larger loan is serious federal fraud that can result in criminal prosecution, substantial prison time, and huge financial penalties. HOWEVER, not every discrepancy between what you claimed and what the government thinks you should have claimed is criminal fraud—there’s a difference between honest calculation errors, good-faith interpretation of ambiguous rules, mistakes made by your accountant or payroll company, and deliberate lies intended to steal government money. If your being accused of inflating payroll costs, your defense depends entirely on the specific facts: what you actually claimed, what the true payroll was, what documentation you relied on, whether you had intent to defraud, and whether you can demonstrate this was a mistake rather than intentional fraud.

This article explains what it means to be accused of inflating payroll costs on a PPP application, how serious the consequences can be (criminal prosecution, civil penalties, repayment demands), what kinds of payroll inflation the government is targeting (fake employees, overstated wages, family members who didnt actually work, double-counting across multiple businesses), what defenses exist when the inflation was unintentional (calculation errors, reliance on professional advice, ambiguous guidance), what NOT to do when accused (dont lie further, dont destroy documents, dont ignore the investigation), recent cases showing what sentences people are actually receiving, and what you should do immediately if your facing this allegation. If your being accused of payroll inflation on your PPP loan, getting experienced legal representation immediately is absolutely critical—this is not something you can handle yourself.

What Does It Mean to Be Accused of Inflating Payroll Costs?

The Paycheck Protection Program allowed eligible businesses to borrow up to 2.5 times there average monthly payroll costs (calculated from the 12 months before the loan or from calendar year 2019 or 2020, depending on when you applied). So if your average monthly payroll was $40,000, you could borrow up to $100,000. Because the loan amount was directly tied to payroll costs, overstating payroll by even a modest percentage resulted in significantly larger loan proceeds.

“Inflating payroll costs” means you claimed higher payroll expenses on your PPP application than you actually incurred. This can happen in many ways:

Claiming employees who didnt exist or didnt work for you: Listing fake employees on your application, or listing family members or friends as employees when they didnt actually work for the business, or counting someone as a full-time employee when they only worked part-time or didnt work during the calculation period at all.

Overstating wages, salaries, or compensation: Claiming you paid $10,000/month in salaries when you actually paid $6,000/month, or including compensation that wasnt actually paid (claiming bonuses that were never distributed, for example), or inflating individual salaries beyond what was actually paid.

Including ineligible compensation in payroll calculations: The PPP had rules about what counted as “payroll costs”—for example, compensation above $100,000 per employee annually was capped, and certain types of compensation didnt qualify. If you included amounts that shouldnt have been counted under PPP rules (like compensation above the cap, or payments to independent contractors rather than employees), the government might characterize this as inflating payroll.

Double-counting employees across multiple businesses: If you owned multiple businesses and applied for PPP for each business, but you counted the same employees as working for multiple businesses simultaneously (so the same person appears on the payroll for Business A and Business B when they only actually worked for one), that’s inflation.

Using payroll from different time periods or manipulating the calculation period: Cherry-picking the most favorable calculation period rather than using the period you were supposed to use, or using payroll figures from 2021 when applying in 2020 (when only 2019 or early 2020 data should have been used).

The accusation is typically based on a comparison between what you claimed on your PPP application and what the government believes your actual payroll was based on tax documents (941 forms, W-2s, W-3s, state unemployment filings, income tax returns), bank records, or other documentation. If there’s a significant discrepancy—you claimed $50,000/month in payroll but your 941 forms show only $30,000/month—the government will investigate whether the discrepancy was intentional fraud.

How Serious Is This Allegation? What Are the Potential Consequences?

Inflating payroll costs on a PPP application to obtain a larger loan is federal fraud, and the potential consequences are severe:

Criminal prosecution for bank fraud or wire fraud: PPP applications were submitted to banks (lenders), and PPP funds were transferred electronically, which means inflating payroll to get a larger loan can be prosecuted as bank fraud under 18 U.S.C. § 1344 (maximum 30 years in prison and up to $1 million fine) or wire fraud under 18 U.S.C. § 1343 (maximum 20 years in prison and up to $250,000 fine). If the fraud amount exceeds certain thresholds, sentencing guidelines can recommend substantial prison time—someone who fraudulently obtained $200,000+ through payroll inflation could face guidelines recommending 4-6+ years in prison depending on the circumstances.

False Claims Act liability: The government can pursue civil penalties under the False Claims Act for submitting false information to obtain PPP funds. FCA penalties can be up to three times the amount of the fraudulently obtained loan PLUS per-claim penalties of $13,946 to $27,894 (adjusted for inflation). So if you fraudulently obtained $100,000 by inflating payroll, the civil penalty could exceed $300,000 plus additional statutory penalties.

Loan forgiveness denial: If your being investigated for payroll inflation, your PPP loan forgiveness application will almost certainly be denied. You’ll be required to repay the full loan amount plus interest. Even if you legitimately used the funds for payroll and other qualifying expenses, the SBA will deny forgiveness if they believe the loan was obtained through fraud.

Repayment demand for the inflated amount: At a minimum, you’ll be required to repay the portion of the loan that was based on inflated payroll. If you should have received $60,000 but you received $100,000 due to inflated payroll, expect a demand for repayment of at least $40,000 plus interest.

Exclusion from future federal programs: A fraud conviction or settlement can result in you being barred from participating in federal programs, obtaining federal contracts, or receiving federal grants or loans in the future.

Professional and reputational consequences: Fraud allegations and convictions can destroy your professional reputation, result in loss of professional licenses (if your a CPA, attorney, real estate broker, or in another licensed field), make it impossible to obtain financing, and damage business relationships.

The government has been extremely aggressive in prosecuting PPP fraud. As of 2025, hundreds of people have been criminally charged with PPP fraud involving payroll inflation, and many have received prison sentences ranging from probation to 5+ years depending on the fraud amount and circumstances.

Honest Mistake vs. Intentional Fraud—What’s the Difference?

Not every discrepancy between your claimed payroll and your actual payroll is criminal fraud. Theres a critical distinction between honest mistakes and intentional fraud:

Honest mistakes that might not be fraud:

• Calculation errors where you used the wrong formula but didnt intend to inflate (you misunderstood how to calculate average monthly payroll and accidentally included amounts that shouldnt have been included)
• Reliance on incorrect information from your accountant or payroll company (your accountant calculated payroll costs for you, and there calculation was wrong, but you reasonably relied on it)
• Ambiguous guidance and good-faith interpretation (PPP guidance was confusing and sometimes contradictory, and you made a good-faith interpretation that turned out to be wrong)
• Documentation errors where the actual payroll was correct but you used the wrong supporting documents or made clerical errors in transferring numbers from one form to another

Intentional fraud that the government will prosecute:

• Deliberately listing fake employees who never worked for you in order to inflate payroll
• Knowingly overstating wages or salaries to get a larger loan
• Creating false payroll documents (fake W-2s, fake 941 forms) to support inflated payroll claims
• Misrepresenting the number of employees when you knew the true number was much lower

The key element that separates mistakes from fraud is INTENT. Did you intend to deceive the lender and the government to obtain a larger loan than you were entitled to? Or did you make a genuine error without fraudulent intent? Intent is hard to prove directly, so prosecutors look at circumstantial evidence like whether you had the correct information available but ignored it, whether you created false documents, whether you lied to your accountant or lender, whether you concealed information, and whether the “mistake” always went in your favor (people dont accidentally inflate payroll and then accidentally use LESS than there entitled to—the mistakes that are genuine tend to be random, while fraud is systematically in the applicant’s favor).

If you can demonstrate that the discrepancy was an honest mistake—you have emails showing you asked your accountant for help, you relied on there calculation, you didnt create false documents, you had a reasonable basis for believing your calculation was correct—you might avoid criminal prosecution even if you have to repay the difference. But if the evidence shows you knew the payroll numbers were inflated and you submitted them anyway, your facing serious criminal exposure.

What Triggers Investigations Into Payroll Inflation?

How does the government discover potential payroll inflation? Several triggers:

Loan forgiveness review: When you apply for PPP loan forgiveness, the lender and the SBA review your application and supporting documentation. They compare your claimed payroll costs from the original loan application to your tax documents (941 forms, W-2s, W-3s, income tax returns with payroll deductions). If theres a significant mismatch—you claimed $40,000/month on the application but your 941s show $25,000/month—red flags go up and an investigation begins.

SBA Office of Inspector General audits: The SBA OIG is conducting targeted audits of PPP loans, especially larger loans and loans where initial screening identified potential red flags. They compare loan application data to IRS records, state unemployment records, and other government databases. If your claimed payroll doesnt match whats in government systems, you’ll get an audit notice.

Lender review and suspicious activity reports: Some lenders are reviewing PPP loans they originated and reporting suspicious activity to FinCEN and law enforcement. If your lender discovers discrepancies after the loan was funded, they might report it as potential fraud.

Whistleblower complaints: Employees, former business partners, competitors, or others who know your business might report suspected fraud to the SBA OIG hotline or to law enforcement. If someone reports that you claimed 20 employees but only had 8, the government will investigate.

Cross-referencing multiple applications: If you applied for PPP for multiple businesses, the government compares the applications to see if theres overlap (same employees claimed for multiple businesses, inconsistent payroll figures across related applications).

Once an investigation is triggered, the government will request documentation to verify your payroll: 941 forms, W-2s and W-3s, state unemployment filings, payroll journals, bank statements showing payroll deposits, copies of paychecks or direct deposit records, and sometimes interviews with employees to confirm they actually worked for you during the relevant period.

What Defenses Exist If You’re Accused of Payroll Inflation?

If your being accused of inflating payroll costs and you believe it was unintentional or there are mitigating circumstances, potential defenses include:

Calculation error without fraudulent intent: You made a mistake in how you calculated average monthly payroll, but you didnt intend to defraud anyone. You can demonstrate what calculation you used, why you thought it was correct based on the guidance available, and that there was no intent to deceive. This defense requires showing that you had a reasonable basis for your calculation even though it turned out to be wrong.

Reliance on professional advice: Your accountant, CPA, or payroll company calculated your payroll costs, and you reasonably relied on there professional expertise. You provided them with accurate information, they did the calculation, and you submitted what they told you to submit. If the calculation was wrong, it was there error, not your fraud. This defense requires documentation showing you consulted with a professional and relied on there advice.

Ambiguous guidance and good-faith interpretation: PPP guidance was confusing, changed multiple times, and was sometimes contradictory. You made a good-faith interpretation of ambiguous rules, and while your interpretation might have been overly generous, it wasnt fraudulent. This works better if you can point to specific guidance that supported your interpretation, or if other businesses made similar interpretations.

Documentation issues, not actual payroll inflation: Your actual payroll costs were correct, but theres a mismatch between your application and your tax documents because you used different calculation methods, or because certain compensation was reported differently on different forms, or because of timing differences. You can reconcile the discrepancy with additional documentation showing the payroll was legitimate.

Negligence vs. intentional fraud: Even if you were careless or negligent in calculating payroll (you should have been more careful, you should have double-checked the numbers), negligence is not the same as fraud. Fraud requires intent to deceive. If you can show you didnt have fraudulent intent, you might avoid criminal prosecution even though you might still face civil consequences.

These defenses are highly fact-specific and require careful development with an experienced attorney. You cant just claim “it was a mistake” without evidence supporting that claim. You need documentation, contemporaneous records, communications with professionals, and a coherent explanation of how the error occurred without fraudulent intent.

What You Absolutely Should NOT Do When Accused

If your being investigated or accused of payroll inflation, certain actions will make your situation much worse:

Dont lie to investigators or submit false information in response to the investigation. If the SBA or FBI asks you to provide documentation or explanation, dont create false documents, dont lie about what happened, and dont try to cover up the original problem with additional fraud. Lying to federal investigators is a separate crime (18 U.S.C. § 1001) carrying up to 5 years in prison, and it turns what might have been a mistake into clear criminal conduct.

Dont destroy documents or try to hide evidence. Destroying payroll records, deleting emails, altering documents, or hiding evidence is obstruction of justice and can result in additional criminal charges that are sometimes worse than the underlying fraud allegation. Preserve all documents, emails, and records related to your PPP loan and payroll.

Dont ignore the investigation. If you receive a letter from the SBA OIG, DOJ, FBI, or your lender requesting information about potential payroll discrepancies, dont ignore it hoping it will go away. Ignoring an investigation signals guilt and gives the government reason to escalate to criminal prosecution. Respond through an attorney, but respond.

Dont talk to investigators without an attorney present. You have the right to have an attorney present during any interview with federal investigators. Dont try to “explain” the situation to investigators on your own—anything you say can be used against you, and even truthful statements can be misinterpreted or taken out of context. Tell investigators you want to cooperate but you need to consult with an attorney first.

Dont assume its “just” a civil matter. Some borrowers think that payroll discrepancies will result in having to repay the difference but wont lead to criminal prosecution. This is wrong. The DOJ has criminally prosecuted hundreds of PPP fraud cases, and payroll inflation is one of the most common charges. Treat any fraud allegation as potentially criminal from the start, and get criminal defense representation, not just civil or business representation.

Recent Cases: What Sentences Are People Actually Receiving?

To understand the real-world consequences, here are examples from recent PPP fraud prosecutions involving payroll inflation:

Amanda Davis (Eastern District of Pennsylvania): Created fictitious marketing firms and submitted false PPP applications with inflated employee counts and payroll expenses. She fraudulently obtained approximately $190,000. Sentenced to 44 months in federal prison, followed by 3 years of supervised release, and ordered to pay $190,000 in restitution.

Robert Martinez (Southern District of Florida): Overstated employee numbers and monthly payroll costs on PPP applications for multiple businesses, obtaining approximately $250,000 fraudulently. Sentenced to 32 months in prison, 3 years of supervised release, and ordered to pay full restitution.

Civil settlement in Southern District of New York: Four restaurants, two fur apparel companies, and five individuals settled False Claims Act allegations for $4.6 million. The defendants had inflated payroll and employee headcounts in PPP applications, including misrepresenting that family members and an acquaintance were employees when they were not, and listing the same individuals as employees of multiple businesses. This was a civil settlement (no criminal prosecution), but the financial penalty was massive.

The pattern in these cases: Fraud amounts over $100,000 with clear evidence of intentional inflation (fake employees, false documents, multiple fraudulent applications) typically result in multi-year prison sentences. Smaller fraud amounts with some mitigating factors might result in probation, home confinement, or shorter prison terms. But almost all cases result in full restitution (repayment of the fraudulently obtained amount) and significant supervised release periods.

What Should You Do If You’re Accused of Inflating Payroll Costs?

If your facing allegations of payroll inflation on your PPP application, take these steps immediately:

Step 1: Hire a federal criminal defense attorney with PPP fraud experience. This is not a matter you can handle yourself, and its not something a general business attorney can handle—you need a criminal defense attorney who understands federal fraud prosecutions and has experience with PPP fraud cases specifically. The attorney will review your loan application, your actual payroll records, and the evidence to determine whether the discrepancy was an honest mistake or whether your facing serious criminal exposure.

Step 2: Gather all documentation related to your payroll and PPP application. Collect your PPP loan application, forgiveness application, 941 forms, W-2s and W-3s, payroll journals, bank statements showing payroll payments, communications with your accountant or payroll company, and any other records showing what your actual payroll was. Your attorney will need to compare what you claimed to what the documentation shows to assess whether theres a defensible explanation for any discrepancies.

Step 3: Dont communicate with investigators without your attorney. If the SBA OIG, FBI, DOJ, or your lender contacts you for an interview or requests documents, tell them you need to consult with your attorney before responding. Your attorney will coordinate any responses and will be present for any interviews.

Step 4: Evaluate whether to self-report errors or negotiate a settlement. In some cases where the inflation was clearly an error and you can demonstrate lack of intent, your attorney might advise self-reporting the error and offering to repay the excess amount to avoid criminal prosecution. In other cases, the better strategy is to wait for the government to make there case and then present defenses. Your attorney will advise based on the specific facts.

Step 5: Preserve all evidence and dont do anything that could be seen as obstruction. Dont delete emails, dont alter documents, dont destroy records. Make sure employees and anyone else involved know not to destroy anything either. Obstruction charges can be worse than the underlying fraud allegation.

Talk to a Federal PPP Fraud Defense Attorney Today

Being accused of inflating payroll costs on your PPP application is serious, and the potential consequences—federal criminal prosecution, years in prison, massive financial penalties—are life-changing. But not every payroll discrepancy is criminal fraud, and with the right defense strategy, it might be possible to resolve the matter without prosecution or with reduced consequences.

Our firm defends clients facing PPP fraud allegations including payroll inflation. We have experience with federal fraud prosecutions and understand how the government investigates these cases. We review your loan application and documentation to determine whether defenses exist. We negotiate with prosecutors when settlement or declination is possible. We defend against criminal charges when prosecution moves forward. And we protect our clients from making the situation worse through inadvertent statements or actions.

If your being accused of inflating payroll costs on your PPP application, contact us today for a confidential consultation. We’ll review the allegations and the evidence. We’ll assess whether you have viable defenses based on honest mistake, reliance on professionals, or ambiguous guidance. We’ll advise on whether to cooperate with the investigation or assert your rights. And we’ll develop a defense strategy to protect you from criminal prosecution and minimize financial consequences. Time is critical in these cases—dont wait until charges are filed to get representation.

Federal fraud allegations are serious, but they’re not hopeless. Call us now.