Tax time bares benefits fraud
Form reveals extent of identity theft in jobless-aid filings
SACRAMENTO, Calif. — Unemployment agencies across the country were bombarded with so many claims during the pandemic that many struggled to distinguish the correct from the criminal.
Now, simple tax forms — barely enough to fill a halfsheet of paper — are revealing the extent of the identity theft that made state-run unemployment offices lucrative targets for fraud after millions of people lost their jobs during the pandemic.
Unemployment benefits are taxable, so government agencies must send a tax form — known as a 1099-G — to people who received the benefits so they can report the income on their tax returns. States are mailing 1099-Gs in huge numbers this year after processing and paying a record number of unemployment claims.
In Arkansas, Joseph McSpadden never lost his job and didn’t file last year for unemployment compensation, but he recently received a Form 1099G from the Arkansas Division of Workforce Services for $2,102 in unemployment benefits in 2020. That’s despite notifying the workforce services agency, a part of the state Department of Commerce, last year that he had been a victim of identity theft.
McSpadden, who works for FedEx Freight in Harrison, said he filed a report with the Harrison Police Department — which he then sent to the agency — and took other action to contest the unemployment claim.
“I’m not too worried about my case and having to pay taxes on money I didn’t receive, because I think I’ve taken all the right action,” McSpadden said this week. “But [the Workforce Services Division], in my case alone, is paying thousands of dollars out to somebody that shouldn’t be getting it.”
Gov. Asa Hutchinson said in August that a claim had been
falsely filed under his name, too. Arkansas had some 37,000 questionable claims at the time from its regular unemployment compensation program and a new federal program for the selfemployed and “gig” workers.
The workforce services website says: “After you submit a fraud report, [the division’s] Fraud Investigation Unit will take appropriate action, including freezing the account associated with the report. If any payments were made, they will not be recognized as income to you at the end of the calendar year.”
The division also says it will send new tax forms, to reflect that no unemployment compensation actually had been paid in cases like McSpadden’s, if the division has received a police report. “[The division] is working diligently to continue to match police reports with the fraud claims prior to the IRS deadline…. Unfortunately, due to sheer volume, we are still processing the police reports that have already been submitted.”
Nearly 26 million people requested unemployment aid in the initial months after states began ordering shutdowns because of the pandemic. The unprecedented surge strained state unemployment offices that are governed by federal rules but administered in patchwork fashion by state governments, with many relying on 1960s-era software to process applications and issue payments.
The federal government, as part of its $2 trillion relief package approved in March, significantly expanded joblessness aid, making it a richer target for fraud. By November, numerous states said they had paid as much as $36 billion in improper benefits, with a significant portion obtained through fraud, according to a report from the U.S. Department of Labor’s Office of Inspector General.
The fraud is so widespread that California issued payments to someone using the name of U.S. Sen. Dianne Feinstein, and in Ohio, Republican Gov. Mike DeWine, his wife, Fran, and Republican Lt. Gov. Jon Husted all learned that fraudulent claims were filed in their names.
Now, unemployment agencies could face another onslaught — this time from people requesting corrected tax forms.
“It does open a can of worms,” said Rob Seltzer, a certified public accountant in Los Angeles and a member of the California Society of CPAs. “It really depends upon how fast the [state] is able to send out a corrected form.”
Ohio has set up a telephone line and created a website allowing residents to report identity theft. Once the state confirms fraud has been committed, taxpayers will receive a corrected 1099-G form. In the past two weeks, 62,000 people had filed reports, according to spokesman Thomas Betti.
“It’s really easy for somebody to be like, ‘This isn’t my problem. They sent me the form, I’ve never been to Ohio.’ Still, you need to take care of this,” Betti said. “Every unemployment system in the country is dealing with this massive amount of fraud.”
Last month, the IRS said that it is likely that many victims won’t be able to get a corrected tax form in time to file their federal taxes. In those instances, the IRS says taxpayers should ignore the 1099-G and file their taxes without reporting the fraudulent income.
Christina Elliott, owner of BEM Financial Services, worries that process could delay tax refunds for people who are counting on them to make it through the pandemic. She has two clients — one in California and one in Georgia — who say they received incorrect forms showing they received as much as $27,000 in unemployment benefits last year.
“They are literally going to have to investigate each one,” Elliot said about the IRS. “These people already had their identity stolen that they didn’t know about, here lies another problem where they will be waiting months just to get their [tax refunds] that are owed to them.”
The problem could be most acute in California, where officials mailed close to 8 million tax forms last month — more than five times the number they send in a normal year. The state Employment Development Department said it has updated its website and hired another 300 agents for its call center, training them on how to handle questions about the 1099-G forms.
Rooting out fraud and identity theft has been an ongoing struggle for the agency. A state audit released last week showed that from April to October, it responded to less than 2% of fraud reports.