Unemployment fraud can be a nightmare for taxpayers

Stefani Reynolds / Bloomberg through Getty Images

Millions of Americans will receive tax forms for unemployment benefits this filing season. However, many people get them wrong because of fraud, which can cause headaches for recipients.

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

That amount could eventually exceed $ 63 billion, the watchdog said last week.

Security experts say identity theft was one of the most common scams. Fraudsters file fraudulent unemployment claims based on the stolen personal information of individuals who did not file it.

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The fraudster receives the unemployment income, but the victim of the identity receives the corresponding 1099-G tax form. The federal government treats unemployment benefits as tax-free income. (However, some states do not tax.)

Fraudsters were attracted by a relatively high payout per capita, especially in the spring and summer when the federal government paid $ 600 a week. The pandemic unemployment benefit program was often targeted because it allowed recipients to self-prove that they had lost their jobs.

“This is a critical issue that plagues U.S. labor departments, including local, state and even international criminals,” said Mark Butler, Georgia’s labor commissioner, about unemployment fraud.

What to do?

Individuals who receive Form 1099-G but have not collected benefits must first seek the corrected form from the state unemployment agency. This revised 1099-G shows that the taxpayer did not collect money.

Some fear it may be difficult to get through government agencies that have been delayed amid the pandemic amid the historic volume.

States may have different instructions or ways to report identity fraud. California, for example, has set up a telephone hotline designated for Form 1099-G questions and increased call-center staff.

According to the IRS, taxpayers who are unable to obtain the corrected form until they submit their tax must continue to file an accurate return. In other words, they should report only the income received, not the unemployment benefits reported at 1099-G.

But they should consider explaining in a footnote to their tax return that they were wrongly given 1099-G, said Michael D’Addio, director of Marcum’s accounting firm in Connecticut, New Haven.

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

“At the end of the day, it’s very hard to get the IRS to agree that an item is not taxable if they have a form that says it’s taxable income,” D’Addio said. – It tends to get this improved form from the state.

The IRS issued guidance to states in late December notifying them not to send 1,099-G to individuals who are considered victims of identity fraud, which should reduce the number of individuals involved.

Other informations

According to the agency, taxpayers are not required to file an identity theft statement with the IRS for an incorrect 1099-G. These statements are only required if the taxpayer’s return filed in e-mail is rejected because, according to the IRS, a return using the same Social Security number has already been filed.

Those who have stolen their personal information and want to protect their identity when submitting their federal tax return can request an identity protection PIN from the agency. The PIN prevents someone else from submitting a return with the taxpayer’s social security number.

Other measures are proposed for victims of potential identity theft, according to the Georgian Ministry of Labor. They include:

  • Submitting a police report and keeping a copy for presentation to creditors and credit agencies;
  • Change passwords for email, bank and other personal accounts;
  • Asking credit card companies, banks and other financial institutions to put a fraud alert on your account;
  • Obtain a copy of a credit card report and report fraudulent transactions with any of the three largest credit information companies (Equifax, TransUnion, or Experian). You can also place a fraud alert on your loan portfolio and consider freezing your loan.