Unemployment fraud can create a nightmare for taxpayers

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

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

That sum could eventually reach over $ 63 billion, the watchdog said last week.

Identity theft is among the most common frauds, according to security experts. Fraudsters file fraudulent unemployment claims using the stolen personal data of individuals who have not filed.

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

Scammers were lured by a relatively high payout per person, especially in the spring and summer when the federal government paid an extra $ 600 per week. The Unemployment Pandemic Assistance Program was frequently targeted as it allowed beneficiaries to self-report that they had lost a job.

“This is a critical problem plaguing labor departments across the United States sometimes involving local, state and even international criminals,” Georgia Labor Commissioner Mark Butler said of unemployment fraud .

People who receive a 1099-G form but have not received benefits should first contact the state unemployment agency for a corrected form, according to the IRS. This revised 1099-G would show that the taxpayer had not received any money.

Some fear that it will be difficult to communicate with state agencies, which have been plagued by delays during the pandemic in a historic volume.

States may have different instructions or means of reporting identity fraud. California, for example, has set up a hotline for Form 1099-G questions and increased call center staff.

Taxpayers unable to get a corrected form when they file their taxes must still file an accurate return, according to the IRS. In other words, they should only report the income they received and not the unemployment benefits reported on the 1099-G.

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

Taxpayers should also continue to request a corrected tax form even after filing, he said. Otherwise, the IRS may not have up-to-date information at hand and may inquire about a discrepancy.

“In the end, it’s very difficult to convince the IRS that an item is not taxable when they have a form stating it’s taxable income,” D’Addio said. “You tend to want to get this corrected form of condition.”

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

Taxpayers do not need to file an identity theft affidavit with the IRS for an incorrect 1099-G, according to the agency. These affidavits are only required if the taxpayer’s electronic return is rejected because a return using the same Social Security number has already been filed, according to the IRS.

Those concerned that their personal information has been stolen and who wish to protect their identity when filing their federal income tax return can apply for an identity protection PIN from the agency. The PIN prevents someone else from filing a return 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 understand:

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