Unemployment compensation fraud was one of the more common
identity theft schemes that emerged in 2020 as criminals exploited the COVID-19
pandemic and the resulting economic impact.
Unemployment compensation is taxable, although Congress waived the tax for 2020
for many people. States report compensation to the individual and to the IRS by
using the Form 1099-G. Because of fraud and identity theft, many taxpayers
received Forms 1099-G for compensation they were not paid. Some taxpayers
received forms from multiple states.
This
scam could affect 2020 or 2021 tax returns. Here are some steps tax pros should
take to help victims of the unemployment compensation fraud scheme:
- File Form
14039, Identity Theft Affidavit. This should be done
only if an e-filed tax return rejects because the client's Social Security
number has already been used. Do not file the IRS Form 14039 to report
unemployment compensation fraud to the IRS.
- Report fraud to state workforce agencies, and request a
corrected Form 1099-G. Each state
has its own process for reporting unemployment compensation fraud. The
U.S. Department of Labor has created an information page with all state contacts and other information.
- File a tax return reporting only the actual income
received. State workforce agencies may
not be able to issue a corrected Form 1099-G in a timely manner. Even if
the client has not received a corrected Form 1099-G, report only wages and
income received and exclude any fraudulent claims.
- Consider an IRS
Identity Protection PIN. Clients receiving Forms 1099-G are
identity theft victims whose personal information could be used for
additional criminal activities, such as filing fraudulent tax returns. All
taxpayers who can verify their identities can now get an Identity
Protection PIN to protect their SSN.
- Follow Federal Trade Commission recommendations for
identity theft victims. Taxpayers should consider steps to protect their credit and
other actions outlined by the FTC. The Department of Labor website
explains how individuals should report unemployment identity theft
- Reply to notices in a timely manner. Tax pros' business clients can also
assist in fighting unemployment compensation fraud by responding quickly
to state notices about employees filing jobless claims, especially when it
has no record of those employees.
The
American Rescue Plan Act allows an exclusion of unemployment compensation of up
to $10,200 for individuals for tax year 2020. In the case of married
individuals filing jointly this exclusion is up to $10,200 per spouse. To
qualify for this exclusion, the taxpayer’s adjusted gross income must be less
than $150,000. This threshold applies to all filing statuses. The exclusion may
ease the burden on many fraud victims. However, victims who received Forms
1099-G from multiple states may have fraud claims that exceed the exclusion
amount.
More
information:
- Publication 4557, Safeguarding Taxpayer Data
- Publication5293, Data Security Resource Guide for Tax
Professionals
- Small Business Information Security: The Fundamentals
- Identity Theft Central
