Don't Recognize That 1099 Form? Don't Pay Taxes on It

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Got a 1099 tax form you don't recognize? Your personal information may have been stolen by identity thieves who filed for unemployment in your name. The good news, however, is that at least you won't have to pay taxes on scammers' ill-gotten gains. 

The IRS recently warned people who receive a “Form 1099-G” showing unemployment benefits they never received to contact state agencies and let them know. Doing this will “help taxpayers avoid being hit with an unexpected federal tax bill for unreported income,” the agency said in a statement. In case you didn't know (and many don't), unemployment benefits count as taxable income in the eyes of the IRS.

When the pandemic destroyed jobs all across the country, millions filed for unemployment to make ends meet. From March through the end of 2020, U.S. residents filed more than 68 million new unemployment claims, according to the U.S. Department of Labor, compared to just over 11 million in all of 2019.

Complaints of fraud also ballooned: The Federal Trade Commission reported 394,280 benefits fraud complaints in 2020, compared to just 12,900 in 2019. They overwhelmingly involved identity theft involving unemployment benefits, the FTC said in a blog post.

While precise statistics on exactly how many claims were actually fraudulent are hard to come by, multiple states reported being inundated with bogus claims from scammers.

In California, 9.7% of all unemployment benefits paid out between March and January went to fraudulent claims, state officials said. That's more than $11 billion lost to criminals in just one state.

And in Rhode Island, the problem was so bad that the Justice Department assigned a U.S. attorney to the state in November just to prosecute unemployment fraud cases. In one such instance, police arrested four people and seized $1.2 million in cash, accusing the suspects of stealing people’s identities to apply for unemployment benefits. Rhode Island recently set up a special website for unemployment identity theft victims to report the fraud, in line with other states

One source of the problem was the well-intentioned Pandemic Unemployment Assistance Program, which provides benefits to independent contractors and gig workers who are ordinarily ineligible, and did not, until recently, require proof of employment.

While the FTC and the Labor Department have issued warnings for months about the large scale scam erupting in the midst of the pandemic, some taxpayers may find out that their identities have been stolen only upon receiving 1099-G forms around tax time. 

Consumers should keep an eye on their credit reports to monitor for fraud at annualcreditreport.com, the FTC said. Anyone whose identity has been used by scammers should report it via identitytheft.gov. Taxpayers can also file for an “Identity Protection PIN” from the IRS to prevent anyone else from filing a tax return using their Social Security numbers.