When ID thieves claim unemployment in your name - what to do?

Many taxpayers this year have been surprised to learn they were unemployed - at least in the eyes of state employment agencies, who sent bewildered recipients Forms 1099s reporting the payment of unemployment compensation. 

When the pandemic first hit, many people lost jobs. Unfortunately, identity thieves found an opportunity.  To keep up with the volume of claims received, many states modified their practices and started paying out benefits immediately without verifying claim validity.  While these changes resulted in paying valid claims right away, the emphasis on processing the claims quickly opened the door for fraud.  The U.S. Department of Labor’s Inspector General estimates approximately $89 billion in unemployment compensation was paid in 2020 due to fraud.

As 2020, drew to a close, states started sending Forms 1099-G to unemployment benefit recipients for their personal tax filing.  As a result, identity theft victims started receiving Forms 1099-G from one state - in some cases multiple states - reporting unemployment benefits paid to criminals who stole their identities.

In response to the large volume of fraudulent claims, the Internal Revenue Service, U.S. Department of Labor, and unemployment agencies for each state have worked together to provide the steps necessary to correct the matter and provide additional resources.

How to be proactive with the IRS when responding to fraudulent unemployment benefits?

As a part of the IRS’ security summit, they recently published IR-2021-163 to provide resources to properly respond to identity theft. The IRS also offers proactive options to help safeguard data and prevent identity theft.  The steps listed by the IRS to assist unemployment compensation identity theft victims:

1. File a Form 14039, Identity Theft Affidavit PDF, 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.
2. 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 at gov/fraud.
3. 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 income on 1099-Gs from fraudulent claims.
4. 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 obtain an Identity Protection PIN to protect their SSNs. Read more about IP PINs at gov/ippin.
5. 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 DOL also includes this information on its gov/fraud page.
6. Finally, tax professionals' 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 DOL.gov/fraud webpage lists a hyperlink and phone number for each state to assist with reporting fraudulent unemployment benefits.  Each state has a unique process, but the hyperlinks take you directly to the correct place to enter your data.  The response time for each state will vary. 

When working through a fraudulent unemployment claim matter, documentation is key.  If a 1040 only includes the actual income a taxpayer received, it will not match what the IRS has in their system from forms 1099-G filed by the states  Following and documenting the steps above will help to correct the records and to address IRS notices triggered by fraudulent claims.