Expanded unemployment insurance was an essential lifeline for families during the Covid-19 pandemic. However, it presented an opportunity for unscrupulous individuals and groups to defraud the U.S. government. Of the $871 billion in unemployment insurance claims paid out in 2021, it is estimated that $163 billion were improper payments, including $60 billion in fraudulent charges.

The new Congress has placed unemployment insurance fraud front and center with a collection of committee hearings. The deliberations can generally be put into two categories: A) recouping fraudulent UI payments from 2020 through 2021 and B) preventing future fraud. In February, Ways and Means Chair Smith (R, MO-08) introduced the “Protecting Taxpayers and Victims of Unemployment Fraud Act” (“Unemployment Fraud Act” or “UFA”). The bill aims to “recover stolen taxpayer money, help states ensure this scale of fraud never happens again, and help bring to justice those who committed these crimes.” 

The bill has four primary measures:

  1. It incentivizes states to recover fraudulent payments by allowing them to retain 25% of any payments recovered. Ordinarily, these payments would be returned to the federal government.
  2. It allows states to retain 5% of overpayments, conditional on the state meeting data-matching integrity conditions and putting aside money for future anti-fraud efforts.
  3. States are required to participate in a data sharing system to receive the above funds.
  4. The time limit to recover UI funds is extended from 3 to 10 years.

While some of these measures, namely the data-matching provisions, would be upgrades over the status quo, there are areas for improvement. With a handful of fixes, the bill could become much more effective at targeting the improper pandemic payments sent to criminals, protecting American families, and preventing future fraud. There are four ways in particular that the bill can be improved: 

  1. Do not fund state-level mechanisms for recouping UI fraud by eliminating existing funding for federal-level efforts.
  2. Require states to participate in the data information sharing systems.
  3. More carefully delineate which provisions apply to overpayments, and which apply to fraud.
  4. Establish durable investments and simpler administrative rules to help counter fraud.

Do not finance state-level mechanisms for recouping UI fraud by defunding federal-level fraud prevention.

One of the bill’s primary tools is incentivizing states to pursue more UI fraud recoupment on their own. UFA would allow states to retain a portion of any money they recover from anti-fraud efforts. Specifically, states are allowed to keep 25% of any recovered fraud payments and 5% of any overpayments, which is meant to align states’ motivations with current anti-fraud efforts. 

Unfortunately, the bill directly pits current anti-fraud efforts against efforts to prevent future fraud to make the bill deficit neutral. The UFA provisions are funded by ending $2 billion of the UI-related American Rescue Plan provisions. These funds were set aside “to detect and prevent fraud, promote equitable access, and ensure the timely payment of benefits“ and can be used at the discretion of the Secretary of Labor. In this capacity, these funds have been used to support the DOL “Tiger Teams”  dispatched to states to help with fraud prevention and aid modernization efforts.

In other words, UFA changes the mechanisms by which we are trying to prevent fraud and recoup losses, not whether we try to do so. Under current law, primary anti-fraud measures are centralized at the Federal level, and the DOL has been provided with a set amount of funds and has wide discretion over how they are applied. This would change under UFA. Instead of providing funds upfront, a share of the recouped dollars would be used to incentivize states to conduct their own investigations. 

State and incentive-based approaches have their merits, but cannot supplant the current federal-level efforts entirely. Crimes that are committed across state lines require federal level enforcement. Instead of eliminating the existing funds for fraud prevention systems, we should consider other potential funding sources. This is especially important given that current estimates suggest that most UI fraud occurred across multiple states.  The DOL OIG estimated that nearly 2/3rds of UI fraud resulted from “multi-state claimants”—people receiving benefits in multiple states. Given this, it doesn’t make sense to cut federal anti-fraud measures.

Require states to participate in the data information sharing systems.

If policymakers want to adequately prepare to prevent a repeat of the pandemic-era fraud, it’s critical that there is a coordinated approach by—and between—states. Criminal enterprises exploited that states could not easily verify if claimants were accessing benefits elsewhere, resulting in unchecked multi-state fraud.

Federal policymakers must prevent a disjointed approach moving forward. Adopting UFA data-sharing provisions should not be left to each state’s discretion. Transparency and collaboration are key to understanding what is going on. All states must collectively share their claimant info and utilize national data, such as the State Information Data Exchange System (SIDES).

More carefully delineate which provisions apply to improper payments and which apply to fraud.

A perennial issue is distinguishing between UI fraud and “improper payments”. A reference to “improper payments” do not necessarily indicate fraud. Rather it can mean something as simple as “the state DOL did not complete all the paperwork appropriately”.

For example, during COVID, UI claimants could qualify to receive UI benefits in two ways. They could receive the standard UI that existed before the CARES Act, or they could receive Pandemic Unemployment Assistance (PUA). PUA was designed as a stop-gap UI system for people who would not be eligible for UI under normal circumstances, such as gig workers or recent college graduates with a limited employment history.

To receive PUA, one must first apply for regular unemployment benefits and be denied. States were instructed to check every month to see if any PUA recipients had become eligible for regular UI. Because of the complex schedules used to determine UI eligibility (for example, that the most recent quarter of data is often excluded from eligibility calculations), it is possible that a person who had been working for a short time might have initially only been eligible for UI payments from PUA, but would become eligible for regular UI after a few months.

States were famously overloaded during the early months of the pandemic and are still digging out from this surge of claims today to correct various documentation and processing issues. For instance, most states did not conduct monthly checks to see if PUA recipients were now eligible for standard UI during this period. These PUA payments are technically “improper payments,” but this does not imply that the recipient received more UI payments than they were owed—merely that they were paid by the PUA funding stream instead of the funding stream for general UI. In many cases, they would have received larger UI checks had the PUA validity check been completed.

Note that the above is only one scenario where an “improper payment” may have occurred without any error, deliberate or otherwise, originating from the UI recipient. 

This confusion has led to some flaws in the text of the UFA bill. The original CARES Act provisions included language that allowed any overpayments of unemployment insurance claims to be recouped by denying future UI benefits for up to 3 years. Any person with an improper claim on file for any amount would not receive future UI benefits until that amount was paid off.

UFA increases this by allowing states to deny benefits for up to ten years for people who received improper payments. While this may be reasonable in the case of fraudulent payments, it is certainly not appropriate in most “improper payment” cases. Many people who followed all the rules and regulations could be denied unemployment benefits in the next recession. While we should be taking every step necessary to recoup fraudulent payments, denying people UI benefits because their state DOL failed to follow protocols is an indiscriminate denial of benefits and weakens unemployment insurance’s ability to function as an automatic stabilizer in future recessions. UFA should be modified by revising the language to only apply to explicit fraudulent payments and not improper payments generally.

Counter fraud through durable investments and simpler administrative rules

During the pandemic, state DOLs were allowed to hire workers without being subject to the merit staffing provisions in federal law. This allowed states to quickly staff up their teams to handle program administration. For example, state DOLs could hire temporary employees to assist with data entry or hire old employees that had recently retired as contractors without putting out an RFP for a competitive bidding process.

This effort produced mixed results. For example, it allowed states to set up emergency call centers to ensure that frustrated claimants could talk to a human about any issues with their payment. This was especially important during the first few weeks of the pandemic when millions of people applied for unemployment insurance. However, adding new administrators to handle the rapid surge in benefit claims was less effective. The new hires were prone to making errors when processing claims since sound eligibility determinations require considerable experience.

UFA would enable states to continue utilizing these relaxed hiring standards established early in the pandemic, bypassing the typical merit-based personnel standards, “including for detection, pursuit, and recovery of fraudulent overpayments.” There is a reasonable worry that continuing this practice could be more trouble than it is worth. As discussed above, many inaccurate payments over the last two years have been due to administrative errors. It is hard to rely on relatively inexperienced workers to uphold program integrity and process complicated tasks. 

We agree that staffing levels must increase to ensure the systems function well against criminal activity. However, the main issue is a financial one: DOLs lack the adequate administrative funding necessary to accomplish requested tasks. Recent fiscal allocations have reversed a decades-long decline in administrative funding provided to states. However, additional investment is needed to return to Bush-era spending levels (and undo the years of underinvestment). Waiving merit pay requirements is akin to putting a band-aid on the problem, rather than providing a solution.

Policymakers should provide state departments with sufficient funding while separately putting forward reforms that make UI claims easier to process. Some eligibility considerations will always require more extensive experience, but some processes and regulations are unnecessarily complex. Simplifying program rules could enable less-tenured workers to take up a larger collection of tasks, especially in crises like pandemics, allowing staff veterans more time to focus on the most challenging questions. Congress has an opportunity to improve administrative functions by making the UI system less complicated.


Pandemic-related UI fraud was unacceptable, and efforts should look to recover the lost funds and create systematic changes to avoid these issues in the future.

The “Protecting Taxpayers and Victims of Unemployment Fraud Act” takes several steps by encouraging states to do more to recoup these funds and to participate in data matching systems that can decrease future fraud. Still, there are many ways to improve the bill. 

Making these changes would substantially improve the effectiveness of the “Protecting Taxpayers and Victims of Unemployment Fraud Act.” Furthermore, it would make it more likely that it—or a similar bill—would ultimately pass through Congress and get signed by President Biden. UI pandemic fraud is worth taking seriously, and that requires a bill that can actually pass.