1099-G FRAUD

[IL-Tax-Pro]

There will be many instances this year of taxpayers receiving a Form 1099-G for Unemployment Benefits fraudulently paid by the state to a claimant pretending to be the taxpayer.  How do we handle this in ProSeries?

[Skylane]

I would think the TP would have to speak to the State UE people to get it resolved or at least a letter stating there were no benefits received.

Theoretically, the state should issue a corrected 1099-G (Good luck).  

I don't think there's anything you can do in ProSeries to identify the income and then back it out. I'd probably omit the income, put in a preparer note. Then have the documentation of fraud handy to answer the IRS letter when it comes...

Edit;  you may also consider attaching the 1099-G and documentation when e-filing

[BobKamman]

Even if you have a self-driving car, the software won't help you change a flat tire.  

[Just-Lisa-Now-]

Im not sure what the IRS stance on this is, Id be tempted to put it on the return (to avoid the CP2000 in a couple years) then back it out on the Other Income line.  then be prepared to send a letter to IRS if need be in the future.

You can report UI fraud here, will give yua  record of reporting the fraud.

https://www.identitytheft.gov/

Upper right corner has a UI fraud link

[IRonMaN · Accepted solution]

It's one thing put to something someplace on a return and then back it off because there was an issue as to how something was reported by a third party.  I really don't want to put something on a return that doesn't belong to a client in any shape or form.  Hopefully I don't run into the issue, but if I do, I'm going to have the taxpayer talk to the folks down in St Paul to have them correct the 1099.

[BobKamman]

@Just-Lisa-Now- "I'd be tempted to put it on the return (to avoid the CP2000 in a couple years)"

I would have the client sign a waiver first:

"I understand that tax practitioners have no knowledge of the algorithms used by IRS to select returns for audit. This includes whether an additional $______ income reported as having been received, when it was not, and a subtraction of $_______ , when there is no basis for such a deduction, will ultimately lead to my return being audited when otherwise it would not be.  I agree that this is being done to avoid a half hour of work to respond to a computer notice that might be issued by IRS, which is already well aware that many 1099-G forms are issued because of fraudulent unemployment claims."

But my question here is, what makes you think the 1099-G is going to be mailed to the taxpayer whose identity was stolen, anyway?  1099-G forms can be delivered electronically, with consent:

"Electronic recipient statements. If you are required to
furnish a written statement (Copy B or an acceptable
substitute) to a recipient, then you may generally furnish
the statement electronically instead of on paper, but only if
you meet the requirements discussed later in this section."

[IL-Tax-Pro]

"But my question here is, what makes you think the 1099-G is going to be mailed to the taxpayer whose identity was stolen, anyway?"

In Illinois, there have been many thousands of fraudulent on-line applications for unemployment benefit.  The state is mailing follow-up notices to the original taxpayers at their state income tax filing addresses.  The taxpayers did not even know their identity had been stolen until they receive the follow-up notice.  So, yes, I expect they will receive 1099-G forms showing the unemployment benefits electronically paid the fraudsters.

[BobKamman]

@IL-Tax-Pro "The state is mailing follow-up notices to the original taxpayers at their state income tax filing addresses. "

Why do you think they are doing that?  Maybe because they want to follow IRS instructions regarding this situation? I do expect both IRS and state agencies will be overwhelmed with fixing all the erroneous claims.  IRS can be incompetent sometimes, but it's easy enough for them to just shut off CP-2000 notices involving unemployment income, and in their best interest.  It's encouraging that at least Illinois is trying to prevent issuance of erroneous 1099-G forms. The sky is not falling.  Yet.  

From IRS on December 29:

If a payor or a law enforcement agency determines based on all facts and circumstances that, due to identity theft, payments made under an unemployment compensation program were not made to the individual under whose name the benefits were claimed, the payments should not be reported on Form 1099-G.

If payments made due to identity theft are mistakenly reported on Form 1099-G in the name of an identity theft victim, a corrected Form 1099-G reporting $0 should be issued to the identity theft victim and filed with the IRS as soon as possible after the error is discovered.

https://www.irs.gov/forms-pubs/identity-theft-guidance-regarding-unemployment-compensation-reporting

[Ephesians3-14]

I agree 100% with Lisa. Pick up the income on the 1099-G and then simply back it out on the Other Income line. Done. There's no audit issue and no CP5000 issue because you can prove it's not income that you actually received.

[qbteachmt]

WA UI tells you to file identify theft with the IRS as well as letting the WA UI know. That way, once they determine you are in fact the harmed party, they will send a corrected 1099-G. They also note there were two ways this fraud occurred: taking over your existing UI account or making an account on your behalf.

[BobKamman]

IR-2021-24, January 28, 2021

WASHINGTON – The Internal Revenue Service today urged taxpayers who receive Forms 1099-G for unemployment benefits they did not actually get because of identity theft to contact their appropriate state agency for a corrected form.

https://www.irs.gov/newsroom/irs-offers-guidance-to-taxpayers-on-identity-theft-involving-unemployme... 

[Tax Slayer]

Will the IRS hold up the taxpayer refund if a fraudulent 1099-G reporting doesn't match? The IRS said NOT to include the fraudulent 1099-G on the tax return, but to be prepared to provide documentation if (when) the letter comes. Do we follow the IRS guidelines and not include the fraudulent 1099-G on the taxpayer return? I spoke with an IRS rep last week on the Tax Practitioner Hotline who admitted they are 6-12 months behind on addressing taxpayer letters/issues. Does this mean the taxpayer refund gets held up for 6-12 months because of the mismtach? Or do we disregard the IRS guidelines, include the fraudulent 1099-G, and back it out so the the refund gets timely issued? How are you preparers handling this?

[Just-Lisa-Now-]

Havent seen any yet. Personally Id opt for the include and exclude to avoid the CP2000.  But I dont kow if thats the right way to do it.
They wont be cross matching on the fly, it would come as a CP2000 letter in the next 12-20 months.

[BobKamman]

Document matching under the Automated Underreporter program won't even start until after the extended October 15 deadline.  You won't see CP-2000 notices for 2019 until April, even if they follow their usual schedule (which is doubtful).  Most of them come out more than a year after most returns are filed.  If IRS had the technology to compile W-2s and 1099s, most taxpayers wouldn't need to file a return (that's how they do it in countries like Great Britain and Estonia, which aren't dealing with a third-world tax collection system).  

[qbteachmt]

"They wont be cross matching on the fly, it would come as a CP2000 letter in the next 12-20 months."

I would skip it for now and during that delay, you hopefully get it resolved from the State. Until it is resolved through the provider, the IRS will consider it real, even if there also is an ID Theft reported for IRS purposes.

We got 2 mailings: the 1099-G and a follow up notification. I suppose that allows them to find out you didn't know about the G because it got sent to a different address.

[BobKamman]

IRS can do some dumb things, but I won't go so far as to predict they will take 1099-G reports of unemployment compensation seriously when they run them through the Automated Underreporter program.  There are going to be so many fraudulent ones that it will bog down everything else.  

They can't do many smart things, though, so I don't expect them to send a preliminary notice to possible CP-2000 matches, asking if they really did collect unemployment last year.  Even that would jam the phone lines, not just at IRS but at state unemployment offices.  

Even though these are submitted electronically by the states, IRS does not have the capacity even to process them into the system, much less match them to returns, until late May.  See chart on Page 24:

 https://www.gao.gov/assets/720/711468.pdf