During 2020 a number of states found themselves being faced with claims for unemployment that were fraudulent in nature. Perpetrators would use information they had obtained to claim to be another person, filing for unemployment in that person’s name and having the payment redirected to come to them. Some victims are just discovering this issue in January as they receive a Form 1099G from the state government showing that they had been paid unemployment compensation.

In News Release IR-2021-14[1] the IRS outlined steps for such individuals who have received information returns showing payment of unemployment compensation they never applied for to take.

The IRS describes the problem as follows:

During 2020, millions of taxpayers were impacted by the COVID-19 pandemic through job loss or reduced work hours. Some taxpayers who faced unemployment or reduced work hours applied for and received unemployment compensation from their state. Under federal law, unemployment benefits are taxable income.

However, scammers also took advantage of the pandemic by filing fraudulent claims for unemployment compensation using stolen personal information of individuals who had not filed claims. Payments made as a result of these fraudulent claims went to the identity thieves, and the individuals whose names and personal information were taken did not receive any of the payments.[2]

The IRS advises taxpayers who receive the erroneous Forms 1099G to take the following steps:

Taxpayers who receive an incorrect Form 1099-G for unemployment benefits they did not receive should contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits. Taxpayers who are unable to obtain a timely, corrected form from states should still file an accurate tax return, reporting only the income they received. 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.[3]

The release also notes that the IRS has previously issued guidance to the states indicating that in these circumstances no Form 1099G should be issued,[4] which will hopefully (but not necessarily) make it easier for victims to persuade state agencies to correct these erroneous Forms 1099-G:

The IRS previously issued guidance requested by states on identity theft guidance regarding unemployment compensation reporting. No Forms 1099-G should be issued to those individuals the states have identified as ID theft victims.[5]

If taxpayers are unable to get the state to issue a corrected Form 1099-G the victim has the right to dispute the Form 1099-G if the IRS attempts to collect related to the erroneous form. IRC §6201(d) provides:

(d) Required reasonable verification of information returns

In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary under subpart B or C of part III of subchapter A of chapter 61 by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.

[1] IR-2021-24, January 28, 2021, https://www.irs.gov/newsroom/irs-offers-guidance-to-taxpayers-on-identity-theft-involving-unemployment-benefits (retrieved January 29, 2021)

[2] IR-2021-24, January 28, 2021

[3] IR-2021-24, January 28, 2021

[4] “Identity theft guidance regarding unemployment compensation reporting,” IRS website, https://www.irs.gov/forms-pubs/identity-theft-guidance-regarding-unemployment-compensation-reporting (retrieved January 29, 2021)

[5] IR-2021-24, January 28, 2021