Due to the COVID-19 pandemic, millions of Americans were unemployed during 2020 and 2021. Most of these individuals qualified for unemployment compensation benefits. However, criminals also benefited by targeting these individuals for identity theft. The U.S. Department of Labor Inspector General estimates that criminals captured $89 billion of unemployment compensation through fraud and identity theft during 2020.
IRS Commissioner Chuck Rettig stated, "Identity thieves always look for opportunities, and the unemployment surge presented a new opportunity to exploit the pain and financial hardships faced by Americans. This particular scam is especially egregious because 23 million Americans were jobless or underemployed last year, and desperately needed these benefits."
Unemployment compensation is taxable income. However, Congress passed an exclusion for up to $10,200 in unemployment compensation for the 2020 tax year in the American Rescue Plan Act of 2021. To qualify for the exclusion, taxpayers in all filing statuses must have less than $150,000 of adjusted gross income (AGI). Tax advisors and victims of unemployment compensation fraud should take multiple steps to correct the fraudulent activity.
- Identity Theft Affidavit — If a victim has filed a tax return and it is rejected because his or her Social Security number has been previously used, the tax preparer should file IRS Form 14039, Identity Theft Affidavit.
- State Agencies — The unemployment compensation fraud should be reported to state workforce agencies. The victim can request a corrected Form 1099–G from those state agencies.
- Income Tax Return — Tax returns should only report actual income received. Even if the IRS Form 1099–G with the correct information has not yet been received, report only the wages and income received.
- Identity Protection PIN — If your personal information was used for criminal actions such as filing a fraudulent tax return, you should go to the "Get an Identity Protection PIN" page on IRS.gov and request an Identity Protection PIN. This will enable the IRS to know you are the correct person when you file your tax return.
- Federal Trade Commission (FTC) — The FTC has information available that enables you to protect your credit through specific actions. This is available on DOL.gov/fraud.
Unemployment fraud affects a variety of victims. Some taxpayers have been victimized by criminals filing unemployment compensation claims in multiple states. An individual who receives Form 1099–G from multiple states should retain records of the fraud reports made to each state.
Commissioner Rettig is correct that this is a particularly outrageous form of identity theft. Many of the victims desperately needed to receive their unemployment tax benefits. By following the guidelines and reporting this fraud to the Internal Revenue Service, the Department of Labor and the Federal Trade Commission, the advisor can enable a victim to recover his or her status and qualify again for federal benefits.