Victims of unemployment-benefit fraud face tax-season surprise

This year's tax season is bringing an extra surprise to many Americans: the news that they were victims of unemployment-insurance fraud that has topped billions of dollars nationwide.

Michael Baird, a 33-year-old marketing manager in Chicago, hasn't lived in Texas for several years. And yet there was a tax form from the state of Texas sitting at his parents' house in Houston, showing that the state had paid him $1,014 in unemployment benefits.

Mr. Baird was among the victims of jobless-benefits fraud who found out when they received a 1099-G tax form noting unemployment compensation, even though they never applied for or received the benefits. The forms, produced by state agencies, are also sent to the Internal Revenue Service. Unemployment benefits are usually considered taxable income, and the IRS uses them to make sure income is reported correctly.

"My worry is that I'm going to file for taxes and the IRS is going to see that I got this unemployment compensation and think that I'm not paying taxes on it," Mr. Baird said.

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Victims are often confused when they receive fraudulent 1099-Gs. Many states recommend that victims freeze their credit and report the fraud through the state unemployment agency's website or fraud hotlines.

"We are collaborating with our partners across federal and state government to identify the most streamlined approach to providing clear direction, information, support and resources for these individuals who have had their identities used to fraudulently collect unemployment benefits," a U.S. Labor Department spokesman said.

The IRS has been urging taxpayers to not include income from fraudulent 1099-Gs on tax returns and to seek corrected forms from states. But it isn't yet clear how the IRS is handling situations in which there is a mismatch between forms received by the government and money received by the individual.

"You want to hold people harmless in this, if they're caught up in it in any way," said Rep. Brad Wenstrup (R., Ohio).

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A late change to the relief law just signed by President Biden should lessen the tax problem. For households making less than $150,000 in 2020, the first $10,200 per spouse won't be treated as income. That doesn't address households above that income level or resolve all state income-tax implications.

In addition to tax forms, victims discover the fraud when they try to file for jobless benefits or receive notifications from the state unemployment office or their employer, according to a Federal Bureau of Investigation notice.

Congress during the pandemic has expanded unemployment benefits -- offering as much as a $600-a-week supplement -- to help workers through the crisis. But those benefits have also been a target for identity thieves. States have collectively received millions of unemployment-insurance requests that officials believe to be tied to fraud, with losses likely in the billions of dollars.

Ohio's labor department had received 65,800 reports of fraudulent 1099-Gs from individuals through its website as of March 2. Colorado had received about 11,700 reports of fraudulent 1099-Gs for the 2020 tax year as of March 4.

Mr. Baird, the Chicago marketing manager, said he submitted a fraud report to the Texas unemployment agency's online fraud portal. He also tried calling the Texas unemployment agency several times but couldn't connect with an agency representative.

"In all of this, I've never even talked to a real person, so it's real tricky," he said. "You don't even know if the steps you're taking are the correct steps."

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He is concerned about what the IRS will do if he doesn't get an amended 1099-G form before he files for taxes.

Some U.S. lawmakers have the same concern.

"We cannot allow their income-tax refunds -- which often are the single largest payment an individual receives each year -- to be held up indefinitely while the IRS investigates an identity theft claim," a group of House members wrote last month to IRS Commissioner Charles Rettig.

A spokesman for the Texas Workforce Commission, which administers unemployment insurance for the state, said the agency can issue a notice with the IRS and in some cases issue a corrected 1099-G. The spokesman said Mr. Baird took the correct steps in reporting the case through the state's online fraud portal.

Rebecca Ray, 41, of Greendale, Wis., said she was shocked to receive a 1099-G form from Colorado indicating she filed for unemployment insurance last year. She hadn't applied for benefits since the 2007-09 recession.

Ms. Ray froze her credit to protect against identity theft. She plans to get a new job in the finance industry in the near future and worries about the impact of the fraudulent claim.

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"The thought of having anything on my record for my next background check totally freaks me out," she said.

Ms. Ray said she filed a request for a corrected 1099-G form in late January but hadn't received it as of March 8.

A spokeswoman for the Colorado Department of Labor and Employment said that the state had mailed the amended 1099-G tax form to Ms. Ray's home.

"The process to distribute corrected 1099-Gs takes time because each report of an incorrect 1099-G needs to be manually verified for accuracy, " the spokeswoman said. "We are currently expanding resources, so this team can process these requests as quickly as possible."