8/3/2021
The IRS, state tax agencies and the tax industry working together as the Security Summit outlined how tax professionals can assist clients who were victims of unemployment compensation fraud schemes that targeted state workforce agencies in 2020 and 2021.
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. Addressing unemployment compensation fraud is the third in a five-part series sponsored by the Security Summit to highlight critical steps tax professionals can take to protect client data. This year's theme "Boost Security Immunity: Fight Against Identity Theft" is an effort to urge tax professionals to secure their systems and protect client data during the pandemic and its aftermath.
"Identity thieves always look for opportunities, and the unemployment surge presented a new opportunity to exploit the pain and financial hardships faced by Americans," said IRS Commissioner Chuck Rettig. "This particular scam is especially egregious because 23 million Americans were jobless or underemployed last year and desperately needed these benefits."
The U.S. Department of Labor's Inspector General estimated $89 billion in unemployment compensation was lost in 2020 due to fraud.
Unemployment compensation is taxable income on federal taxes, 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. Many people received Forms 1099-G for compensation they did not receive because of fraud and identity theft; some received forms from multiple states.
This scam could affect 2021 returns next year as well as 2020 returns this year.
Here are steps tax professionals can take to assist clients who are victims of the unemployment compensation fraud scheme:
File a Form 14039, Identity Theft Affidavit, 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 the 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 here: State Directory for Reporting Unemployment Identity Theft
File a tax return reporting only the actual income received. State workforce agencies may not be able to timely issue a corrected Form 1099-G. Even if the client has not received a corrected Form 1099-G, report only wages and income received and exclude any fraudulent claims.
Consider using an IRS Identity Protection PIN (IP 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. An IP PIN is a six-digit number that prevents someone else from filing a tax return using an individual's Social Security number. The IP PIN is known only to the individual and the IRS, and it helps the IRS verify an individual's identity when they file an electronic or paper tax return. More information about IP PINs can be found at IRS.gov/ippin.
Follow Federal Trade Commission recommendations for identity theft victims. Individuals should consider steps to protect their credit and other actions outlined by the FTC. The DOL also includes this information on its DOL.gov/fraud page.
Tax professionals' 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.
Although unemployment compensation is taxable, the American Rescue Plan Act of 2021 allows an exclusion of unemployment compensation of up to $10,200 for individuals for taxable year 2020; for married filing jointly, the exclusion is up to $10,200 per spouse. Adjusted gross income (AGI) must be less than $150,000 to qualify for this exclusion. 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 that exclusion amount. Clients should retain any records of fraud reports to states.
Resources:
IRS Publication 4557, Safeguarding Taxpayer Data
Small Business Information Security: The Fundamentals by the National Institute of Standards and Technology.
IRS Identity Theft Central pages for tax pros, individuals and businesses
Publication 5293, Data Security Resource Guide for Tax Professionals