COVID Tax Tip 2021-120, August 17, 2021
As part of this year’s summer campaign Boost Security Immunity: Fight Against Identity Theft, the IRS and its Security Summit partners outlined ways tax pros can help clients victimized by unemployment compensation fraud schemes.
Unemployment compensation fraud was one of the more common identity theft schemes that emerged in 2020 as criminals exploited the COVID-19 pandemic and the resulting economic impact.
Unemployment compensation is taxable, although Congress waived the tax for 2020 for many people. States report compensation to the individual and to the IRS by using the Form 1099-G. Because of fraud and identity theft, many taxpayers received Forms 1099-G for compensation they were not paid. Some taxpayers received forms from multiple states.
This scam could affect 2020 or 2021 tax returns. Here are some steps tax pros should take to help victims of the unemployment compensation fraud scheme:
- File Form 14039, Identity Theft Affidavit. This should be done only if an e-filed tax return rejects because the client’s Social Security number has already been used. Do not file the IRS Form 14039 to report unemployment compensation fraud to the IRS.
- Report fraud to state workforce agencies, and request a corrected Form 1099-G. Each state has its own process for reporting unemployment compensation fraud. The U.S. Department of Labor has created an information page with all state contacts and other information.
- File a tax return reporting only the actual income received. State workforce agencies may not be able to issue a corrected Form 1099-G in a timely manner. Even if the client has not received a corrected Form 1099-G, report only wages and income received and exclude any fraudulent claims.
- Consider an IRS Identity Protection PIN. Clients receiving Forms 1099-G are identity theft victims whose personal information could be used for additional criminal activities, such as filing fraudulent tax returns. All taxpayers who can verify their identities can now get an Identity Protection PIN to protect their SSN.
- Follow Federal Trade Commission recommendations for identity theft victims. Taxpayers should consider steps to protect their credit and other actions outlined by the FTC. The Department of Labor website explains how individuals should report unemployment identity theft
- Reply to notices in a timely manner. Tax pros’ business clients can also assist in fighting unemployment compensation fraud by responding quickly to state notices about employees filing jobless claims, especially when it has no record of those employees.
The American Rescue Plan Act allows an exclusion of unemployment compensation of up to $10,200 for individuals for tax year 2020. In the case of married individuals filing jointly this exclusion is up to $10,200 per spouse. To qualify for this exclusion, the taxpayer’s adjusted gross income must be less than $150,000. This threshold applies to all filing statuses. The exclusion may ease the burden on many fraud victims. However, victims who received Forms 1099-G from multiple states may have fraud claims that exceed the exclusion amount.