Fraudulent unemployment claims: What to know if you're targeted with this identity theft

As the pandemic prompted millions of job losses in 2020, the federal government responded by putting an extra $600 a week into the pockets of people receiving unemployment benefits, then $300 a week later in the year (the March stimulus bill extends the $300 weekly supplement). The money helped employees laid off from sectors hit hard by coronavirus closures, including the restaurant, concert and tourism industries. It also drew the attention of identity thieves. 

Fraudsters filed for their own payday, pilfering funds administered by state unemployment agencies. The US Department of Labor's inspector general said in February that at least $5.4 billion of unemployment claims were fraudulent and that an estimated $63 billion in total fraud may have occurred in 2020. California has said that it's found more than $11 billion in fraudulent claims, with another estimated $19 billion in claims being investigated as suspicious. 

That means likely thousands of people had their identities stolen and used to claim unemployment payments in their names. The unemployment income can lead to complications at tax-time. Thankfully, the federal government has straightforward steps you can follow to address unemployment benefits claimed fraudulently in your name. Here's what you need to know about paying your taxes if this happened to you, and what you can do about the underlying identity theft. This story was recently updated.

How would I know if someone applied for unemployment insurance in my name?

Many people learned that their identity had been stolen when they tried to file for unemployment last year, only to find someone else was already drawing benefits in their name. Some people received confusing letters from a state unemployment system about their supposed benefits. Others may not have noticed until this tax season, when they received a Form 1099-G from a state unemployment agency for the 2020 tax year.

That's the tax form that records any income you received from unemployment benefits, among other taxable government payments. If you see income reported in Box 1 on the form, that's unemployment compensation, and you normally would owe  taxes  on it if you were in fact receiving unemployment payments. 

Watch this: Your tax questions answered in 3 minutes

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Do I have to pay taxes on unemployment income I never received?

Thankfully, no. The IRS allows you to file a tax return that excludes unemployment income that's been fraudulently claimed by someone else, even if you receive a 1099-G with the income listed.

First, you'll need to contact the state unemployment agency that issued the funds and alert it to the fraud. This US Department of Labor website can connect you to the appropriate state agency. Next, you'll need to ask that agency to issue a corrected 1099-G without the unemployment income listed.

You don't have to wait for the corrected form to arrive before filing your taxes, according to the IRS. Once you've requested the correction, you can file your taxes without including the unemployment income. Also, you don't need to file an IRS identity theft affidavit, which applies only if someone fraudulently files a tax return in your name.

What should I do about the identity theft?

This part is a bit more complicated than paying your taxes. First, you can report the identity theft to three additional agencies: the Federal Trade Commission, the US Department of Justice's National Center for Disaster Fraud, and the Internet Crime Complaint Center, or IC3. The latter is part of a broader partnership between the FBI, the National White Collar Crime Center and the Bureau of Justice Assistance.

Next, you'll want to take some proactive steps to make sure your personal information isn't being used in other places. Typically thieves would need your Social Security number to pull off unemployment fraud, which could also let them target you in other ways. 

The most common abuse of this information would be opening new lines of credit in your name, which can cause serious damage to your credit. Check your credit report to make sure thieves aren't taking out credit cards under your Social Security number, and consider putting a freeze on your credit. You can also consider getting a credit monitoring and identity theft protection service.

Will this kind of unemployment benefit fraud continue?

Unemployment fraud was fairly uncommon before 2020, according to Eva Velazquez, president and CEO of the Identity Theft Resource Center. It wasn't seen as lucrative. 

In 2020, not only were extra funds available but unemployment agencies were also crushed by applications. California's labor secretary, Julie Su, explained to Congress on Tuesday that this led her agency to remove some requirements that critics say could've made it harder for fraudsters to get past the system. If criminals continue to see unemployment agencies as easy targets, the trend could continue.

"We are going to feel this throughout 2021 and beyond," Velazquez said. "It just shows that 2020 was a monumentally weird and devastating year."

Is there anything I can do to protect myself?

There's no way to make sure no one ever files for unemployment insurance in your name. If your Social Security number has been exposed (and it has), that could always be a risk. 

In addition to getting a 1099-G at tax time, or finding out after you get laid off that someone is pulling benefits in your name, there can be other signs something's off. You might receive a request for information from an unemployment agency, or your employer might get a confusing call from the agency about your supposed lack of employment. 

It's best to act early on those warning signs, even if you don't need to file for unemployment payments at the moment.