Fake unemployment claims trigger tax troubles for victims of identity theft

Imagine seeing a tax form pop up in the mail which indicates that you need to claim an extra $5,000 or more in taxable income on your federal income tax return. And you never, ever saw a dime of that money?

But now, are you supposed to pay taxes on it? Whoa, what's that about?

We're looking at a shocking tax time headache for potentially millions of victims of ID theft nationwide. They really don't owe extra taxes but they will spend extra time trying to clear up a mess triggered by widespread phony unemployment claims in 2020 in order to file their federal 1040 tax return.

Robert Pennock was surprised to see a 1099-G show up that reports $5,772 in taxable income. That's money, allegedly, that he received in state unemployment benefits through the Michigan Unemployment Insurance Agency in 2020.

If he received unemployment benefits, it would be taxable income. But he was not laid off during the COVID-19 pandemic. He did not face any furlough. He never applied and never received state unemployment benefits.

Pennock works as a reading specialist for Hulsing Elementary School in Canton, Michigan. He teaches students from kindergarten through the fifth grade.

He did get a couple of clues in the summer that something was up. The human resources office for the Plymouth-Canton Community Schools spotted that unemployment claims were being made in his name in June.

He confirmed with HR that he did not file for unemployment. He's thankful that his employer is trying to help him work out the mess.

He said he immediately went to the Michigan unemployment insurance website and filed both fraud and identity theft claims.

It appeared to him, he said, that those jobless claims were not paid out since he received letters in the mail that his unemployment claim was denied for various reasons.

"And I figured that would be the end of that," said Pennock, 55, who lives in Plymouth Township, Michigan.

It wasn't. He received the 1099 form in the mail around Jan. 22.

Why am I getting a 1099 form for jobless benefits?

The State of Michigan Department of Labor and Economic Opportunity is including a letter with the1099-G forms that it is mailing out now to address identity theft.

"If you have received a Form 1099-G and you have not filed for or collected unemployment benefits in 2020, you may be a victim of identity theft," the letter states.

The letter then details some steps to take, including reporting the fraud by filing a Form UIA 6349, "Statement of Identity Theft." Michigan taxpayers would go to michigan.gov/uia and click on "Report Identity Theft."

Pennock, whose wife Pamela typically prepares their tax returns by using tax software, is researching what he needs to do next. He's also contacted the office of his state rep in Lansing, 20th District State Rep. Matt Koleszar.

Pennock's mother just passed away at age 89 last week, the same week he got the troubling 1099. He had only been able to visit her once in the past year in Ohio during the pandemic.

"My mother used to say it will all work out in the wash," he told me Tuesday. "And I'm sure it will."

On Thursday morning, he had more hope that his mother's words could come true.

"Good news," Pennock emailed me. "Thanks to Rep Kolezcar, someone from the UIA just called me. They are sending a corrected 1099 and directed me to Form 6349, available on the UIA website, which I am to complete and return. The form is titled 'Statement of Identity Theft.'"

He's not angry with the state Unemployment Insurance Agency, as he knows how swamped people who work there must be.

"My anger lies with the people who are taking advantage and stealing money from people."

Massive jobless fraud sweeps the country

All across the country, including Michigan, professional crime rings used stolen ID information to file fraudulent unemployment claims in 2020.

The problem is that if your information was used to file phony jobless claims, the state could soon issue you a Form 1099-G, Certain Government Payments, issued in your name. Unemployment benefits are to be included in taxable income that goes on Schedule 1, Line 7 of a 1040 return.

Experts say you can't just ignore this 1099, as this is income that has already been submitted to the Internal Revenue Service. The incorrect 1099 might create extra headaches and delays when it comes to getting any tax refund.

Ideally, you want the state Unemployment Insurance Agency to issue you a corrected 1099-G to both you and the Internal Revenue Service. The IRS notes in its own publications that you want to contact whoever issued the 1099 if it is not correct.

If you still haven't received the corrected 1099 form by the end of February, the IRS said, you may call the IRS at 800-829-1040 for assistance.

But, realistically, how long might that take? Will you receive a corrected form or an answer from the IRS in time to meet the April 15 tax filing deadline? How long would you have to wait for any tax refund that you're owed?

Remember, the IRS will not even begin processing tax returns until Feb. 12. That's slightly more than two weeks later than last year.

Lynda Robinson, a spokesperson for Michigan's Unemployment Insurance Agency, said the state is "currently not able to determine the number of people who are victims of ID theft."

Yet she noted that since March 15, 2020, the UIA has received more than 230,000 reports related to identity theft. "Each case must be reviewed individually," she said.

She did not have a timetable for how long it might take for the state to issue a corrected 1099 so that people can file their taxes.

"UIA is working as quickly as it can to manually investigate each fraud referral," Robinson said.

"There will be delays in getting a corrected 1099-G Form," she added.

If taxpayers receive a 1099-G because of a fraudulent claim and have not yet received a corrected 1099-G, she said the guidance from the IRS indicates that the taxpayer should not report the income from that 1099-G on a tax return.

Instead, she said, the taxpayer should attach an explanation to the tax return explaining the discrepancy.

The IRS website has a guide on identity theft. See IRS.gov/identitytheft.

Local retiree questions what to do with 1099

"Now I have a 1099 that says it's for $4,880," said Karol Settergren, a retired high school counselor.

Taking a close look at the 1099, she said, it shows that withholdings of $488 for federal income taxes and $270.40 for the state.

"It has my Social Security number on here," she said.

"Now, I'm just concerned what happens when I go to file my taxes."

Settergren, 73, did not file for unemployment benefits in 2020.

She remembers that she did get some paperwork in the summer that said she was denied her claim for unemployment benefits because she didn't provide enough identification. She did not keep that letter.

Again, though, she did not expect a problem since she received information saying the claim was reportedly denied.

"It's just another thing to deal with," she said. "It seems like everything is going wrong in this year of COVID-19."

Last year, a large-scale imposter scheme hit state unemployment systems across the country. Many times, the crooks filed claims for people who didn't lose jobs, such as school teachers, retirees and even some small business owners.

On Monday, California officials confirmed that the state paid out more than $11 billion in unemployment claims relating to fraud during the pandemic, according to The Hill.

An independent report in November indicated that Michigan might have at one point through late May paid out up to $1.5 billion to such fraud.

Con artists found phony jobless claims attractive and a way to steal generous jobless benefits of up to $1,000 a week offered in many states early during the pandemic.

In March, Congress passed the $2 trillion Coronavirus Aid, Relief and Economic Security, or CARES, Act, which included a $600 supplemental federal unemployment benefit and offered benefits to workers who normally wouldn't qualify for state benefits under the Pandemic Unemployment Assistance program.

The crooks were very successful. It was estimated that at least $36 billion could have been scammed out of the system nationwide, according to the Office of the Inspector General for the Department of Labor.

Tax professionals scramble

George W. Smith, a CPA with Andrews Hooper Pavlik in Southfield, Michigan, said he's looking at a 1099 for one client that reports $5,290 in state jobless benefits from the Michigan Unemployment Insurance Agency. Again, money that the taxpayer never received because no jobless claim was made.

Smith's strategy is a bit of a judgment call – and one that isn't suggested by everyone. But he's going to try something different if a corrected 1099 doesn't arrive in time to file a return by April 15.

Since there is a 1099-G out there, he said, he might report the income if a corrected 1099 doesn't show up.

"The IRS computers will not be able to differentiate between what is legitimate and what is not," Smith said.

He would declare the 1099-G income on Schedule 1, line 7, Unemployment Compensation, on the 1040 federal tax return. But Smith said he will take a second step to make sure that his client isn't paying taxes on money that was never received in the first place.

"Then I am going to report it as negative income on Schedule 1, line 8 – Other Income," Smith said.

"That way it nets out to zero taxable income on their return," Smith said. "I am hopeful this will work." He also plans to attach a disclosure to the return explaining the situation.

Smith said he wants his client to make sure that all documentation is in place to report the fraud and back up the claim that these fraudulent benefits aren't taxable, should the IRS challenge his reporting approach.

Even so, your first step when you receive one of these letters has to be to contact the issuer of the 1099-G, usually the state unemployment office, and inform them of the fraud and ask for a corrected 1099-G, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Luscombe said you do not want to include the amount on the 1099-G on your tax return if it was fraudulent.

"Hopefully, you can get the state unemployment agency to correct the 1099-G and file a corrected version with the IRS, but if not, attach a statement to your tax return that the 1099-G was a response to a fraudulent application that you are trying to get corrected and you did not apply for and did not receive any unemployment benefits," Luscombe said.

Yes, expect more headaches, too.

"State unemployment offices have been overwhelmed with valid requests for unemployment benefits as well as fraudulent ones, so their response may take a while," Luscombe said.

He would not be surprised if it could take several months for some to resolve these issues.

The State of Michigan warns of potential delays in its letter: "Please be patient. The rampant imposter fraud and identity theft across the country requires that UIA individually review each claim of suspected fraud. If you have already provided information to the UIA, there is no need to resubmit information unless asked by UIA."

The Michigan UIA will investigate a report of identity theft. "Once identity theft is confirmed, UIA will issue a corrected 1099-G to both you and the Internal Revenue Service," according to the state's letter.

States across the country are issuing these 1099s to fraud victims and alerting the victims on what to do next.

The State of Washington, for example, notes on its website: "When criminals fraudulently claim benefits in someone else’s name, we must investigate and confirm fraud before we can update the IRS."

Colorado has a form online to report an invalid 1099 for its ID theft victims.

Luscombe said ID theft victims can expect that they will be asked for some documentation, such as verifying that you are still employed with your employer.

You also want to document all the steps you have taken to correct the fraud and the names and dates involved when you reported the ID theft. You may want to contact your local police department to document the fraud.

"If you have a valid claim for unemployment benefits in addition to the fraudulent claim having been filed, the fraud process could also hold up your valid claim for benefits," Luscombe said.

You'd want proof that you are a victim of ID theft and that the benefits should not be taxed because a scammer received the money, not you.

More: How scammers siphoned $36B in fraudulent unemployment payments from US

More: How scammers are using unemployment claims to cash in

More: Lost a job? How to pay taxes on unemployment benefits

More: Tax season 2021: How to get a bigger, quicker tax refund

The strange 1099 means you must try to limit future ID theft, too.

ID theft victims are encouraged to file a report with the Federal Trade Commission, which is monitoring unemployment benefits fraud on a nationwide basis. Go to IdentityTheft.gov. A special tab on the right corner directs you to claims about unemployment benefits identity theft.

Take time to check your free credit report at AnnualCreditReport.com to see if there is evidence of other fraudulent activity, perhaps credit cards that are opened in your name by crooks.

The IRS notes that you can place a free one-year fraud alert on your credit reports by contacting any one of the three nationwide credit reporting companies online or through their toll-free numbers. The bureau you contact must tell the other two. Call Equifax at 800-525-6285. Experian: 888-397-3742. And TransUnion: 800-680-7289.

Experts say you might request a fraud alert or credit freeze from the three credit reporting agencies. If you opt for a credit freeze, you would have to have the freeze lifted if you need to take out a loan or apply for credit yourself.

Whatever you do, don't just toss this 1099-G in the trash. It's better to try to deal with this problem sooner, rather than later.

Contact Susan Tompor via stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

This article originally appeared on Detroit Free Press: Unemployment ID theft victims must clear up fake claims to file taxes