Will Identity Theft Victims Have to Pay Tax on Unemployment Benefits They Didn't Receive?

Scammers were busy last year filing bogus unemployment benefit claims using stolen personal information. Here's what the IRS has to say about taxes for ID theft victims.

When most people think of identity theft, images of phony bank accounts, fraudulent tax returns, and unauthorized credit card purchases spring to mind. But there are many other ways scammers can use your personal information to steal money or property – like filing false unemployment benefit claims. There was a rash of this kind of identity theft activity in 2020, which was driven by the rush to get unemployment benefits out quickly during the pandemic and the lure of an extra $600 per week in benefits for part of the year.

But some identity theft victims are now getting a Form 1099-G in the mail reporting unemployment benefits they never received. Unemployment benefits are subject to federal income tax just like wages, and most states tax them too. So, does that mean identity theft victims will have to pay taxes on the unemployment benefits that were swindled using their personal information?

The IRS says "no." The tax agency is telling ID theft victims who receive an incorrect Form 1099-G for unemployment benefits they didn't receive to contact the issuing state agency and request a revised Form 1099-G showing that they didn't get these benefits. The IRS is also instructing states to issue corrected forms to the identity theft victims as soon as possible after the error is discovered.

Identity theft victims who are unable to obtain a corrected 1099-G form before filing their 2020 tax return should still file a return, but only report income they actually received (2020 returns are due April 15, 2021). The IRS will receive a copy of the corrected 1099-G form when it's issued.

Identity Protection PIN Numbers

If you're worried about your personal information being stolen and used to file a fraudulent tax return, you can request an Identity Protection PIN (IP PIN) from the IRS. An IP PIN is a six-digit number that prevents someone else from filing a tax return using your Social Security number. The IP PIN is known only by you and the IRS, and this step helps the IRS verify your identity when you file an electronic or paper tax return.

In the past, only confirmed identity theft victims were able to get an IP PIN. However, starting in 2021, anyone can request an IP PIN and an extra layer of protection from tax-related identity theft. You'll have to pass a rigorous identity verification process, though. Spouses and dependents are also eligible for an IP PIN if they can pass the identity proofing process.

How do you get an IP PIN? If you're a confirmed identity theft victim, the IRS will mail you an IP PIN if your case is resolved prior to the start of the next filing season. Otherwise, you should use the IRS's online Get an IP PIN tool. If you don't already have an account with the IRS, you must first register to validate your identity.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
4 Strategies to Reduce Taxes in Retirement
retirement planning

4 Strategies to Reduce Taxes in Retirement

Don’t let the possibility of higher taxes in the future sink your retirement income plan. Consider these four ways to help manage your taxes, keeping …
May 31, 2021
12 Housing Stocks to Ride the Red-Hot Market

12 Housing Stocks to Ride the Red-Hot Market

The U.S. has a housing shortage and a love affair with home improvement, both of which could create tailwinds for this group of housing stocks.
June 8, 2021


Taxes on Unemployment Benefits: A State-by-State Guide
state tax

Taxes on Unemployment Benefits: A State-by-State Guide

Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
June 10, 2021
IRS Is Sending More Unemployment Tax Refund Checks in June
Coronavirus and Your Money

IRS Is Sending More Unemployment Tax Refund Checks in June

Uncle Sam is issuing 2.8 million refunds this week to people eligible for the new $10,200 unemployment compensation tax exemption. More payments to fo…
June 4, 2021
Perils and Profits of Cannabis Investing with Matt Hawkins
Becoming an Investor

Perils and Profits of Cannabis Investing with Matt Hawkins

A rapidly evolving legal landscape is keeping cannabis investors on their toes. We talk to private-equity investor Matt Hawkins, who has long experien…
June 2, 2021
Pandemic Brings New Scams, Too

Pandemic Brings New Scams, Too

Billions in stimulus funds create new opportunities for fraud ranging from unemployment benefits to vaccine cards.
May 24, 2021