Unemployment fraud can create a nightmare for taxpayers

Millions of Americans will receive tax forms for unemployment benefits this filing season. However, many will receive them in error due to fraud, creating a potential headache for recipients.

At least $ 36 billion was lost in undue unemployment payments, largely due to fraud, in early November, according to an estimate by the Office of the Inspector General of the Department of Labor.

That amount could, in the end, rise to more than $ 63 billion, the agency said last week.

Identity theft is among the most common scams, according to security experts. Scammers file fraudulent unemployment claims using personal data stolen from individuals they have not submitted.

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The fraudster gets income from unemployment, but the identity victim gets the associated 1099-G tax form. The federal government treats unemployment insurance as taxable income. (Some states do not tax benefits, however.)

Scammers were attracted to a relatively high pay per person, especially in the spring and summer, when the federal government paid an extra $ 600 a week. The Pandemic Unemployment Assistance program was a frequent target, as it allowed beneficiaries to declare that they had lost their job.

“This is a critical issue that is affecting US labor departments, involving local, state and even international criminals,” said Mark Butler, Georgia’s labor commissioner, on unemployment fraud.

Individuals who received a 1099-G form, but did not collect benefits, must first contact the state unemployment agency to obtain a corrected form, according to the IRS. This revised 1099-G would show that the taxpayer had not received any money.

Some fear it will be difficult to contact state agencies, which were affected by delays during the pandemic amidst the historic volume.

States may have different instructions or means for reporting identity fraud. California, for example, created a hotline designated for Form 1099-G questions and increased the call center staff.

Taxpayers who are unable to obtain a corrected form at the time of filing their taxes, must still submit an accurate statement, according to the IRS. In other words, they must report only the income they received and not the unemployment benefits reported in 1099-G.

But they should consider explaining in a footnote to their tax return that they received a 1099-G by mistake, said Michael D’Addio, director of the accounting firm Marcum who lives in New Haven, Connecticut.

Taxpayers must also continue to request a corrected tax form even after filing, he said. Otherwise, the IRS may not have updated information at hand and may ask about a discrepancy.

“At the end of the day, it is very difficult to get the IRS to agree that an item is not taxable when they have a form saying it is taxable income,” said D’Addio. “You tend to want to get that corrected form of the state.”

The IRS issued guidelines to states in late December notifying them not to send 1099-Gs to individuals considered victims of identity fraud, which should reduce the number of individuals affected.

Taxpayers are not required to file an identity theft statement with the IRS for an incorrect 1099-G, according to the agency. These declarations will only be required if the taxpayer’s electronic declaration is rejected because the declaration with the same Social Security number has already been submitted, according to the IRS.

Those who are concerned that their personal information has been stolen and want to protect their identity when filing their federal income tax return can apply for an agency’s Identity Protection PIN. The PIN prevents another person from filling out a statement 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:

• File a police report and keep a copy to show creditors and credit bureaus;
• Changing passwords in e-mail, bank and other personal accounts;
• Ask credit card companies, banks and other financial institutions to place a fraud alert on your account;
• Obtain a copy of your credit report and flag any fraudulent transactions with any of the three major credit reporting companies (Equifax, TransUnion or Experian). You can also place a fraud alert on your credit file and consider freezing your credit.