Unemployment Fraud Could Trigger an Unexpected Tax Bill
Here’s how to report the identity theft and correct your taxes so you only pay for income you actually received.
Unemployment fraud exploded in 2020 after the federal government created new programs for people previously ineligible for benefits, relaxed some identity authentication and verification processes, and added $600 to all weekly benefits for four months.
That bait proved irresistible for identity thieves. They used stolen or leaked identity information to file for unemployment benefits under the names of real people or to access legitimate claims in order to send the payments to themselves instead.
Some people have already learned they were victims in this scheme, but others won’t know until they get a letter from the Internal Revenue Service demanding income tax on unreported unemployment benefits they never filed for or received.
“Historically we receive one or two calls a month about unemployment identity theft,” says Eva Velasquez, chief executive officer of the nonprofit Identity Theft Resource Center. “We had over 1,000 calls [in 2020 and January 2021].”
Most states have been hit with this fraud, but none more than California. Its Employment Development Department said that between March 2020 and mid-January of this year, it paid $11 billion in fraudulent claims, or 9.7 percent of the total, and that an additional 17 percent of payments could be fraudulent.
How to Know if You are a Victim of Unemployment Fraud
If your employer was listed on the fraudulent claim, they may have asked why you were filing for unemployment when you still had a job. Catching it early like this can help limit the damage, as employers can report the fraud to the unemployment department and stop payments on the fraudulent claim.
If your address was used on the claim, you may have been mailed Form 1099-G for unemployment benefits you never received. State agencies are supposed to send this form by Jan. 31 to anyone who got unemployment benefits, but the IRS gave the California EDD through the end of February because of the high volume of claims filed in 2020. The form also goes to the IRS, and it shows the total amount of benefits received. Unemployment income must be reported. It is taxable on federal returns, and some states (excluding California) also tax it.
Open any mail from the IRS or your state's unemployment department immediately.
What to do if You’re a Victim
1. Get a corrected Form 1099-G.
The IRS advises taxpayers who receive Form 1099-G for unemployment benefits they did not get to contact the issuing state agency and request a corrected Form 1099-G showing zero benefits. Most state employment departments have instructions on their websites explaining how to do this. “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,” the IRS says in a press release.
If you aren’t able to get a corrected form in time, the IRS recommends filing an accurate tax return that reports only the income you received.
2. Open all mail from the IRS immediately.
Many victims may never get Form 1099-G because it went to the address thieves used on the unemployment claim. If that’s the case, you won’t know you’ve been exploited until you get a notice from the IRS demanding tax on unreported unemployment benefits.
That’s why it’s important to open any mail from the IRS and read every page, says Mary Jannisse, a certified public accountant in Novato, Calif. The notice should explain what to do if you disagree with the demand for additional taxes.
3. Get an identity protection pin from the IRS and freeze your credit.
If thieves have enough information to file for unemployment in your name, consider getting an Identity Protection Pin. This six-digit code will be required on any tax return in your name, which can prevent identity thieves from filing a fake tax return in your name to get a refund. To prevent anyone from opening new credit accounts in your name, place a freeze on your credit report at Experian, Equifax, and TransUnion.
Getting an IP PIN or freezing your credit will not prevent thieves from filing for unemployment benefits in your name, nor from using your name and Social Security number to get a job—a different crime called employment-related identity theft—but those actions will help limit the future damage an identity thief can cause.
How to Report Unemployment Fraud
In California, victims can report unemployment fraud online or by calling (866) 401-2849. The U.S. Department of Labor has a list of where to report unemployment fraud in every state.