Unemployment compensation fraud has been identified as one of the more common identity theft schemes that have emerged since 2020. Scamming criminals exploit victims by leveraging the COVID-19 pandemic and the resulting economic impact. Unemployment compensation is taxable. However, 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.
The IRS and the Security Summit partners have outlined 6 ways for tax pros to help clients who have been victimized by unemployment compensation fraud schemes. Tax professionals and taxpayers alike need to be aware of the following steps to proactively take in response to fraudulent compensation or identity theft.
- 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.
SPS/GZ is a full-service tax reporting firm that provides personalized service and exceptional support, utilizing state-of-the-art technology to create and e-file Forms 1098-T, various 1099s and Affordable Care Act tax forms and Forms 3921 and 3922. For more information, reach out to us at [email protected] or call at (888)375-3049. Our complete and affordable solution allows administrators to simply upload their tax form data file to our secure portal in a few easy steps and we handle everything else to keep your organization compliant. Contact us today!