Personal Finance

Is a scammer getting unemployment benefits in your name? Victims will find out this tax season

Key Points
  • Identity theft linked to unemployment benefits surged during the Covid-19 pandemic.
  • Unsuspecting victims may get a 1099-G tax form detailing benefits they didn't receive.
  • The good news: They don't owe tax on those fraudulent benefits. But there are steps they need to take to protect against financial harm.
Photo by Rafa Elias | Moment | Getty Images

Many victims of identity theft linked to unemployment fraud will learn of the crime this tax season.

Such fraud — whereby organized crime rings and other thieves use stolen personal data to claim unemployment benefits in others' names — has surged during the Covid-19 pandemic.

Victims unaware of an identity breach may get an unwelcome surprise: a 1099-G tax form.

The form, issued by a state unemployment agency, lists the total unemployment compensation collected over the year. The IRS treats benefits as taxable income; recipients generally report the 1099-G data on their federal income tax return.

Fraud victims will get a 1099-G form for benefits they didn't receive, or for a larger sum than they collected. Identity thieves got those funds instead, leaving victims to deal with the fallout.

(Some victims may be notified of the fraud by their employer. A state unemployment agency may contact the employer to verify a layoff before issuing benefits.)

Here's the good news: Victims won't owe tax on those funds. But there are steps victims should take quickly to protect their identity; not doing so could have severe financial repercussions like damaged credit or having bank accounts opened in their name.

"By the time the fraudster has applied for unemployment insurance, who knows what else they used your identity for," according to Michele Evermore, a senior policy advisor for unemployment insurance at the U.S. Department of Labor.

Scope of theft

Identity theft was especially acute in 2020, when millions of people were likely victims, Evermore said.

Criminals were lured by new federal programs that offered larger-than-usual sums of weekly aid and had relatively lax claiming requirements, which helped expedite funds to the jobless at a time of ballooning unemployment.

In most cases, thieves didn't hack the unemployment system for personal data, Evermore said — they got it from past data breaches, like the one that impacted the crediting reporting company Equifax in 2017.

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Be prepared to pay taxes on unemployment benefits in 2022

Federal officials and state agencies have clamped down since early 2020, instituting identity verification and other fraud-prevention measures, Evermore said.

However, criminals are still successful in some cases. About $1 billion of benefits issued between July 2020 and June 2021 was due to confirmed fraud, much of it likely due to identity theft, Evermore said.

"We haven't completely shut down the fraud," she said. "[But] it's been such a huge priority for states. If there's not a significant reduction in 2021 I'd be shocked."

What to do

Federal officials recommend victims take several steps after becoming aware of an unemployment-related identity theft.

Relative to taxes, victims shouldn't delay filing their tax returns. But they should report only the income they received in 2021, not the inaccurate number from the 1099-G.

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Report the theft to the state unemployment agency that issued the 1099-G. (Use this Labor Department state directory to find the appropriate contact.) The state will issue an amended tax form and update the record with the IRS on your behalf, according to the Labor Department.

If possible, report the theft online, which will save time and be easier for the agency to process, according to the Federal Trade Commission.

Further, check your credit report for suspicious activity or unauthorized lines of credit. You can request a free credit report every week through AnnualCreditReport.com or call 1- 877-322-8228, according to the Labor Department.

Also, consider freezing your credit to protect against new accounts being opened in your name.

The Labor Department also recommends reporting the incident to the U.S. Department of Justice's National Center for Disaster Fraud, to help law enforcement stop future theft.  

Victims can consult dol.gov/fraud or the IRS website for more information.