A Surprise Is on the Way to Thousands of Taxpayers in 2021: Tax Identity Theft

More taxpayers could see unexpected 1099s this year — a sign they may be a victim of unemployment benefits fraud.

• More Americans may see an unexpected 1099 form this year. That’s because there are more tax identity theft victims due to rising unemployment benefits fraud.
• In an average year, the Identity Theft Resource Center receives less than 20 inquiries into unemployment benefits. In 2020, the ITRC received more than 700 calls and live-chats.
• The IRS advises anyone who receives a 1099 form related to unemployment benefits fraud to contact the state that paid the benefits. They can request an amended 1099 form that can be sent to the IRS as proof they did not receive the funds.
• Consumers are encouraged to apply for an Identity Protection PIN on the IRS website. The IP PIN can be used when filing an income tax return and help prevent cyberthieves from filing false returns.

COVID-19 benefits fraud has already cost taxpayers overall billions of dollars, but many individual taxpayers will get another jolt: They’ll discover they’re victims of tax-related identity theft.

How are COVID-19 benefits fraud and tax identity theft connected? Fraudsters often use stolen Social Security numbers to claim benefits. Those benefits are taxable, and, if your Social Security number was used to claim them, you’ll likely get a 1099 form for non-wage income in the mail.

It’s a good idea to learn how COVID-19 benefits fraud could make filing your tax return more difficult in 2021. But the timing is right: February 1-5 is Identity Theft Awareness Week.

Here’s what you need to know.

How does tax identity theft from unemployment benefits fraud occur?

Most Americans do not receive a 1099 form. That’s because they receive income from their jobs as wage earners. They get a W-2 form and that’s it. That could change this year for thousands of taxpayers who were victims of identity theft and receive an unexpected 1099 form from a state that paid unemployment benefits in the taxpayer’s name.

If you’re one of them, it may mean that someone has used your identity to fraudulently file for unemployment benefits in one or more states. Those benefits are considered taxable income, triggering the state where the benefits were obtained to issue a 1099 form for income you didn’t receive, for a benefit you didn’t seek. The states also report that income to the IRS. Review the steps below on what to do if you receive an unexpected 1099 form related to unemployment benefits.

Why the rise in unemployment benefits fraud and identity theft?

Congress passed the CARES Act in March 2020 as the COVID-19 pandemic rocked the U.S. and global economies. Tens of millions of unemployed people were in need of assistance. Cybercriminals were also ready to apply for unemployment benefits, using stolen personal information.

To speed payments, some state governments relaxed their identity verification processes. This made it easier for cybercriminals to obtain benefits with stolen credentials — often on a large scale — and made state unemployment offices targets.

In a normal year, fewer than 20 victims of identity crimes related to unemployment benefits contact the Identity Theft Resource Center. In 2020, more than 700 victims of unemployment benefits fraud contacted the ITRC, and over 6,000 consumers visited IDTheftCenter.org looking for information about unemployment benefits fraud.

How widespread is the fraud?

The Department of Labor Inspector General estimates as much as $26 billion in pandemic-related unemployment benefits are fake. California says the amount of fraud in the state’s unemployment benefits system could total $2 billion.

States have intercepted or are aware of the fraudulent payments. But for those fraudulent benefits that reached criminals’ hands, states may still send 1099 forms to the IRS, leading to the expectation that taxes will be paid on the funds.

Say, for instance, your personal information was used to file for benefits in multiple states. In that case, you may have multiple fraudulent 1099s to contest.

IRS officials say they’re prepared for a significant number of taxpayers to contest the forms as the result of tax identity theft, because they did not seek or receive benefits.

What can you do?

The IRS suggests taking these steps if you receive a 1099 form related to unemployment benefits fraud:

1. Contact the state (or states) that paid the benefits to request an amended 1099 form that you can send to the IRS to show you did not receive the funds.
2. File IRS Form 14039, an identity theft affidavit, and submit the form to the IRS as soon as possible.
3. Include a copy of Form 14039 form when filing taxes.

Unfortunately, there are no steps you can take to prevent the unemployment benefits fraud that has already occurred from impacting your tax return that is due soon. But there is an easy step you can take to help protect yourself against future tax-related identity theft on a proactive basis: getting an Identity Protection PIN — or IP PIN, for short.

The IRS now allows any taxpayer who can verify their identity to seek an IP PIN. Previously, the IRS only issued an IP PIN to victims of identity theft and residents of select states.

The IP PIN is a six-digit number that can be used when filing an income tax return to help prevent cyberthieves from filing false returns using your Social Security number. You can apply for one by logging onto the Get an IPN tool offered by the IRS.

Where else to find help?

No one is at fault for falling victim to tax identity theft from unemployment benefits fraud, a crime that can have a devastating impact on lives. The ITRC continues its fight to help those in need.

Victims can call the ITRC (888-400-5530) or live-chat with an expert advisor to figure out the next steps to take. There are also resources available for those who need them. Visit www.idtheftcenter.org to get started.

LifeLock is a proud financial supporter of the Identity Theft Resource Center.