Reminder to be Aware of a Big Unemployment Insurance Scam and to Check Your Tax Form 1099-G one More Time
Yesterday, the IRS issued Tax Tip 2021-26, to the public. Basically, it stated that taxpayers should double check their tax documents i.e., W-2's,1099's etc. that were used to prepare their tax return, before filing a tax return. Since the tax returns are due in April, by now you should have received the W-2’s and 1099’s, in late January. Now is the time to double check the information included on the tax return before your return is filed with the IRS. This verification includes making sure you aren't missing any documents or that the documents you have received, especially the Form 1099-G, which reports to the IRS, the amount of unemployment benefits, you have received are correct. Checking the Form 1099-G is very important this year, because in 2020 crooks have gamed the system and taken advantage of the opportunity resulting from the Pandemic by filing fake claims for unemployment compensation, by using stolen personal information of individuals who had not filed claims. The crooks received the unemployment benefits tax free, whereas the individuals whose names and personal information were taken did not receive any of the payments and will plagued with problems to correct. Under federal law, unemployment benefits are taxable income.
What did the IRS Tax tip state on March 1,2021 to the people who received unemployment compensation in 2020.
The IRS stated that “Many people received unemployment compensation in 2020. For some, this may have been the first time they ever received unemployment. These taxpayers need to know that unemployment compensation is taxable and must be included on their tax return. 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.”
Double check your return before you send it to the IRS, is important to you because:
No one likes to contact the IRS and explain something that could have been corrected before you filed your tax return.
It is almost impossible to contact the IRS by phone, unless you have nothing to do, except wait to speak to anyone, then push buttons to be transferred to a department and then get disconnected.
The IRS did not mention in the Tax Tip, that the source of the incorrect information is tax fraud, from scammers who steal identity. Rather than saying that tax fraud is the cause of the problem, they simply addressed this tax tip to those who received an incorrect Form 1099-G for unemployment benefits. The IRS also did not state that this problem pertains to anyone who received unemployment compensation before 2020, The IRS only addressed first timers who received unemployment compensation in 2020. This seems a bit confusing.
Also, this area is so serious, that on February 26,2021, the U.S. Department of Justice announced that they are investigating Unemployment Insurance Fraud.
The fraud potential is pervasive, and the magnitude is not calculatable at this time.
To show the potential magnitude, in California, an audit showed that while the state's unemployment agency stopped $12.8 billion in bogus payments, it has paid out an estimated $10.4 billion to fraudsters, the Associated Press reported. A red flag, that was missed pertained to multiple claims filed from the same address. For example, 555,000 claims associated with 26,000 addresses, an average of 21 claims per address were not noted as unusual. Unfortunately, the pervasiveness of the fraud, gets worse. You may not receive a 1099-G, but at a later date you receive a letter from the IRS indicating that your identity was stolen and used to file for unemployment benefits that are taxable to you. This risk outcome is sickening.
What to do with a fraudulent Form 1099-G?
The IRS also said that "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". I would also be very clear and tell your accountant immediately, that you received an incorrect Form 1099-G. Do not wait to tell your accountant when you send or drop off the tax information. Your accountant may handle it or advise you, how to explain to the situation to the IRS, either by footnote, or by attaching a schedule, along with sending a letter to your state unemployment division with detailed information and asking them to correct the 1099G. In this way, the accountant might be able to help you sooner, rather than later.