IRS warns of identity thieves stealing unemployment benefits

The Internal Revenue Service is advising taxpayers who received a Form 1099-G for unemployment benefits they never got to contact their state because their identity may have been stolen.

States send Forms 1099-G to taxpayers and the IRS to report any taxable income from unemployment benefits issued by state unemployment agencies. Some taxpayers have reported receiving the forms, however, even if they weren’t unemployed. It turns out that identity thieves have been using information from data breaches to file unemployment claims on behalf of people and having the money sent to their own accounts.

Last year, millions of taxpayers lost their jobs because of the fallout from the COVID-19 pandemic or their employers severely curtailed their work hours. Some taxpayers who faced unemployment or fewer work hours applied for and received unemployment compensation from their state. Under federal law, unemployment benefits count as taxable income.

Andrew Harrer/Bloomberg

However, criminals also took advantage of the pandemic by filing bogus claims for unemployment compensation using stolen personal information of people who hadn’t filed claims. “Payments made as a result of these fraudulent claims went to the identity thieves, and the individuals whose names and personal information were taken did not receive any of the payments,” the IRS said Thursday.

The IRS is advising taxpayers who received a suspicious incorrect Form 1099-G for unemployment benefits they didn’t receive to contact the state agency that issued it to ask for a revised Form 1099-G indicating they didn’t receive the benefits. Besides unemployment benefits, the Form 1099-G can also be for other government payments such as state and local tax refunds, agricultural payments, taxable grants and reemplyment trade adjustment assitance payments.

Many state unemployment agencies have been overwhelmed with unemployment claims over the past year and have been slow to respond. The IRS said taxpayers who can’t get a timely, corrected form from their states should still file an accurate tax return, reporting only the income they received. “A corrected Form 1099-G showing zero unemployment benefits in cases of identity theft will help taxpayers avoid being hit with an unexpected federal tax bill for unreported income,” said the IRS.

The IRS noted that it previously issued guidance that states had requested about identity theft and unemployment compensation reporting, specifying that no Forms 1099-G should be issued to those individuals whom the states have identified as ID theft victims. Nevertheless, incorrect forms have been going out anyway.

The IRS added that taxpayers don’t need to file a Form 14039, Identity Theft Affidavit, with the IRS about an incorrect Form 1099-G. The identity theft affidavit should only be filed if a taxpayer’s e-filed return has been rejected because a tax return using the same Social Security number has already been filed. If taxpayers are worried their personal information has been stolen and they want to protect their identity when filing their federal tax return, they can ask for an Identity Protection PIN from the IRS. The IP PIN is a six-digit number that stops an identity thief from filing a tax return using the taxpayer’s Social Security number. The IP PIN is known only to the taxpayer and the IRS, helping the IRS verify the taxpayer’s identity when filing their electronic or paper tax return.

Fears of identity theft are on the rise. Three out of five Americans (60 percent) believe it is likely that identity theft will cause them a financial loss in the next year, according to research released Thursday by the Harris Poll on behalf of the American Institute of CPAs.

The AICPA has some advice for people worried about identity theft. “Using the same username and/or password across multiple websites is like using a master key for every locked door in your life," said Kim Hardy, a member of the AICPA’s National CPA Financial Literacy Commission, in a statement. "If just one online account becomes compromised, scammers will have the keys to the information behind every password protected account. The surge in online activity as people are spending more time at home during COVID has presented bad actors even more opportunities to steal identities. In this environment, it’s essential that Americans are defending their personal information from fraudulent threats."

Many taxpayers may be surprised to find that unemployment benefits are taxable, and some lawmakers in Congress have proposed to rescind taxes on those benefits in light as part of the relief measures in response to the pandemic. In the meantime, many taxpayers will receive the Form 1099-G in the mail. In some states, taxpayers may be able to get the Form 1099-G by visiting their state’s unemployment website where they signed up for account benefits to get their account information.

Beginning this month, unemployment benefit recipients should receive a Form 1099-G, Certain Government Payments from the state agency paying the benefits. The form will display the amount of unemployment compensation they received last year in Box 1, along with any federal income tax withheld in Box 4. Taxpayers should report this information, along with their W-2 income, on their 2020 federal tax return. For more information on unemployment, see Unemployment Benefits in Publication 525. For more information on identity theft, visit the Identity Theft Central section of the IRS website.