Unemployment fraud can create a tax nightmare
Stefani Reynolds / Bloomberg via Getty Images
Millions of Americans will be given unemployment benefit tax forms this filing season. However, many will get them by mistake due to fraud, which can be a potential headache for recipients.
By early November, at least $ 36 billion had been lost to inadequate unemployment benefits, largely due to fraud, according to an estimate by the Department of Labor’s Inspector General.
That sum could ultimately climb to over $ 63 billion, the watch dog said last week.
According to security experts, identity theft is one of the most common frauds. Fraudsters report fraudulent unemployment claims using the stolen personal information from people who have not submitted it.
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The fraudster receives the unemployment income, but the identity victim receives the associated tax form 1099-G. The federal government treats unemployment benefits as taxable income. (However, some states do not tax tax breaks.)
Scammers were drawn to a relatively high payout per person, especially in the spring and summer when the federal government paid an additional $ 600 per week. The Pandemic Unemployment Assistance program was often targeted because it allowed recipients to self-affirm that they had lost a job.
“This is a critical problem that sometimes plagues labor departments in the United States with local, state, and even international criminals,” Georgia’s Labor Commissioner Mark Butler said of unemployment fraud.
What should I do?
According to the IRS, people who received a 1099-G form but haven’t received any benefits should first contact the state employment office for a corrected form. This revised 1099-G would show that the taxpayer had not raised any money.
Some fear it could be difficult to get to government agencies plagued by delays during the pandemic amid historical volume.
States may have different instructions or points of sale for reporting identity fraud. For example, California has set up a telephone hotline dedicated to questions about Form 1099-G and has increased call center staff.
Taxpayers who cannot get a corrected form at the time their taxes are filed should still file an accurate tax return, according to the IRS. In other words, they should only report the income they received and not the unemployment benefit reported on the 1099-G.
However, you should consider adding a footnote to your tax return stating that you incorrectly received a 1099-G, said Michael D’Addio, principal at accounting firm Marcum, based in New Haven, Connecticut.
Taxpayers should continue to request a revised tax form even after filing, he said. Otherwise, the IRS may not have updated information and may inquire about a discrepancy.
“Ultimately, it is very difficult to get the IRS to agree that an item is non-taxable when they have a form that says it is taxable income,” D’Addio said. “They tend to get this corrected form from the state.”
The IRS issued guidance to states in late December advising them not to send 1099-Gs to anyone believed to be a victim of identity fraud, which should reduce the number of people affected.
Taxpayers are not required to file identity theft affidavits with the IRS for a false 1099-G, the agency says. These affidavits are only required if the taxpayer’s electronic tax return is rejected because the IRS has already filed a tax return with the same social security number.
Those who are concerned that their personal information has been stolen and want to protect their identity when filing their tax return can request an Identity Protection PIN from the agency. The PIN prevents another person from filing a tax return with the taxpayer’s social security number.
There are other measures that potential victims of identity theft are encouraged to take, according to the Georgia Department of Labor. They include:
- Filing a police report and keeping a copy to be shown to creditors and credit agencies;
- Changing passwords for email, banking, and other personal accounts;
- Ask credit card companies, banks, and other financial institutions to put a fraud report on your account.
- Get a copy of your credit report and flag fraudulent transactions with any of the three major credit reporting agencies (Equifax, TransUnion or Experian). You can also put a fraud notice on your credit file and consider freezing your balance.