Unemployment Fraud May Create a Tax Nightmare for Unsuspecting Taxpayers

As if this past year has not been stressful enough, the Office of the Inspector General for the Department of Labor has just announced that at least $36 billion, and possibly as much as $63 billion, has been lost to unemployment fraud. In many cases the improper payments are a result of fraudsters who spent the earliest months of the pandemic filing unemployment claims using stolen personal data. What this means is that millions of unsuspecting Americans are about to receive federal forms reporting unemployment benefits that they never received. Not only does this leave them potentially vulnerable to identify theft issues, but in the short term it also means that the federal government may be expecting them to pay income taxes for money somebody else received.

If your identity was stolen, you’ll receive a form known as the 1099-G from the federal government, which treats certain unemployment benefits as taxable income.

What to Do if You Receive a 1099-G

There is a solution if you are sent a 1099-G for unemployment benefits that you did not receive. Though it represents a bit of work, the IRS has indicated that it is aware of the problem and is working hard to help. They say that recipients of an incorrect 1099-G need to contact their state’s unemployment agency and ask them to send a corrected, revised form that will reflect the correct amount received. Though this may be difficult if you live in a state where the unemployment agency’s response rate has been slowed by the pandemic, some states have established hotlines dedicated to addressing this specific issue and have increased the number of support staff available to help. Much of this increase in attention is the result of guidance that the IRS issued to states at the end of 2020, notifying them of the identity fraud issue.

If you aren’t able to get a revised form by the tax filing deadline, the IRS indicates that you should simply file a return that accurately reflects the amount that you received. Be sure to discuss with your tax advisor about how they can best document your issue.

Do NOT File an Identity Theft Affidavit

It’s completely natural to feel a bit panicked if you receive one of these forms erroneously, but the IRS has said that there is no need to file an Identity Theft Affidavit that is specific to the IRS. The agency says that those affidavits are specifically for taxpayers whose e-filed tax return is rejected as a result of a duplication of the use of their Social Security number for a tax filing. Still, if you are concerned and want to take additional steps to protect your identity then you can ask for an Identity Protection PIN when you file your income taxes. Having this unique number will help keep anybody else from being able to use your Social Security number to file a fraudulent tax return.

Beyond that, you can take the following steps to protect yourself against the impact of unemployment fraud and identity theft:

  • Update your passwords on all personal accounts.
  • Notify creditors, banks and others with whom you have an account that you may have been a victim of identity theft. They will place a special alert on your account. 
  • Contact your local police department to file a report and keep a copy of that report to provide to credit agencies and others if needed.
  • Start monitoring your credit report, keeping a sharp eye open for any transactions that you are not associated with. If needed, dispute transactions with your credit cards or the three credit reporting agencies (Equifax, TransUnion or Experian). If necessary, ask them to freeze your credit until the situation is fully remedied.

If you have been a victim of unemployment fraud and received a 1099-G, contact Cray Kaiser immediately. We’re here to help.


Please note that this blog is based on tax laws effective in March 2021 and may not contain later amendments. Please contact Cray Kaiser for most recent information.