Unemployment Fraud

Unemployment fraud was rarely mentioned before 2020, but unprecedented strain on unemployment insurance (UI) systems and increased benefits as a result of the pandemic were too much for bad actors to ignore. During the pandemic, fraud cases reached historical highs. However, through the combined efforts of state agencies and employers, there has been a significant decrease in fraud (also known as identity theft) claims.

Will UI fraud go away now that there aren’t as many incentives as there were during the pandemic? In a recent interview, the Labor Department’s former deputy director for policy at the Office of Unemployment Modernization said “The biggest takeaway about fraud in unemployment is that unemployment happened to be the target of the moment. However, these fraudsters, in large part, got the information they needed to expose unemployment insurance through other breaches, other security hacks. This personal information, this data is out there…” As long as the bad actors have data, they will most likely continue to find ways to file fraudulent claims.

Fraud Indicators

The unemployment system has added a number of checks and balances to help minimize the number of fraudulent claims that are filed such as data sharing and identity verifications. Even with these additional checks in place, fraudulent claims still get filed. A recent article by Aura outlined a number of ways that you or your employee will find out that someone filed for unemployment using their name.

Either an employee or employer receives mail about an unemployment claim that the employee did not file. As an employer, if you do not show any separation information in your HRIS system, it is a best practice to reach out to the employee before responding to verify the validity of the claim.
An employee receives an IRS Form 1099-G form showing payment of unemployment benefits in 2022. These forms will be mailed out by states by January 31 and can be the first indicator of a potential fraud claim.
An employee may receive a notice from the state Attorney General’s office indicating that an overpayment has been identified and they need to repay the overpayment amount. In this case, the employee should report the potential fraud to both the UI division and the Attorney General’s office.
An employee could file for unemployment benefits, only to be alerted that a claim has already been filed under their name or that their benefits have been exhausted. Much like the situations above, the employee should alert the UI division of the potential fraud issue.

Form 1099-G

Since unemployment benefits are taxable as income, state workforce agencies will soon be sending out IRS Form 1099-G to any individual that received unemployment benefits in 2022. A Form 1099-G is issued to both the taxpayer and the IRS to report any taxable income that was issued by state agencies. States are required to send out this form by January 31, 2023.

Receiving the 1099-G may be the first indication an employee has that an unemployment claim was filed using their identity. As an employer, there isn’t anything that you can do in these cases. Without a claim document, neither you nor Thomas & Company can report this as a fraud claim. The best option you have is to provide clear steps that your employees can take to address potential fraud cases.

The IRS has also prepared information for taxpayers relating to identity theft that can be shared.

Reporting 1099-G Fraud

What steps can your employees take to protect themselves and report fraud when they receive a 1099-G but they didn’t file for benefits?

The first step the employee should take is to report the potential fraud claim to the state. When reporting the case, the employee should indicate that they received a 1099-G for unemployment benefits for which they did not apply. For a complete listing of how to report fraud by state, please visit our UI Fraud Claimant Contact page.

The IRS has provided guidance to states regarding the nationwide identity theft and UI fraud schemes and once the case is reviewed a corrected 1099-G form will be issued.

Identity Theft Fraud: Recommended Actions

The following information can be shared with any employee who may be the victim of an identity theft claim, regardless of how they learned of the fraudulent claim. Advise your employees to take the following steps to ensure they address their unemployment fraud issue:

Personally contact their state agency to report that their identity has been used to file for UI benefits. State specific contact information can be found using the state contact guide.
Report the UI fraud through the Federal Trade Commission website IdentityTheft.gov.
Contact their bank and credit card companies to report that they have been the victim of identity theft fraud.
Communicate with the IRS and review the information at Identity Theft Central.
- The taxpayer should respond to the IRS Form 1099-G or other IRS notices immediately by calling the number included on the form received.
- If an e-filed return is rejected because of a duplicate filing under the Social Security number, or if the IRS instructs the taxpayer to do so, complete IRS Form 14039, Identity Theft Affidavit. Use a fillable form at IRS.gov, print, then attach the form to the return and mail the return according to the instructions.
Contact all three of the credit reporting agencies (Equifax, Experian, and TransUnion) to place a freeze on the taxpayers credit report.