If you get a 1099-G tax form but didn't collect unemployment in 2020, it could be fraud. Here's what to do.

• A loosening of eligibility rules for unemployment insurance led to a rise in fraudulent claims in 2020.
• Every person who received unemployment benefits will get Form 1099-G from their state.
• If you didn’t collect benefits but get a 1099-G saying you did, reach out to your state agency. Don’t report it as income on your tax return.
• See Personal Finance Insider’s picks for best tax software »

Tens of millions of Americans lost their jobs or reduced their work hours in 2020 because of the coronavirus pandemic. Unfortunately, that meant go time for would-be fraudsters.

Around 76 million claims for unemployment have been made since last March. While many of those claims have come from people trying to recoup lost income and stay above water, not all of them are legitimate. 

Unemployment insurance is a joint state-federal government program. People apply for benefits through their state government and get paid by the state. At tax time, states mail Form 1099-G (Certain Government Payments) to the address associated with a claim, or make the form available online, so the taxpayer can report the income on their tax return (yes, it’s taxable). The IRS also gets a copy.

Fraudsters will often use another person’s name and address to file a claim, but include a bank account they have access to to collect the money. If you get Form 1099-G in the mail with your name on it reporting unemployment benefits you did not receive, then it’s likely fraud.

You can quickly find the amount your state paid to your name in unemployment benefits in 2020 by looking at Box 1 on Form 1099-G. In Box 4, you’ll see the amount that was withheld for federal taxes, if any. These are the numbers you need to report on your tax return.

What to do if you get a 1099-G with unemployment benefits you didn’t collect

Don’t report any unemployment benefits as income if you didn’t receive them for a valid claim you filed. If you did get benefits for a period of time, double check that the amount reported on Form 1099-G is accurate — remember: You’re responsible for taxes on all unemployment compensation paid to you.

In guidance released January 28, the IRS advised anyone who receives an inaccurate 1099-G to contact their state agency — not the IRS — to request a corrected form, including if the amount is $0. Here’s a list of the agencies in each state that handle taxes and unemployment benefits. 

If your state agency doesn’t respond in a timely manner, you should still file a federal tax return by the April 15 due date and report only the income you did receive (unemployment, if anything, plus other compensation). A corrected form will also be sent to the IRS, so you don’t need to notify the agency yourself.

Even if you suspect your identity has been stolen to claim unemployment benefits, you don’t need to file an Identity Theft Affidavit, Form 14039, unless you e-file your federal return and it’s rejected by the IRS because a return using your Social Security number has already been filed. 

If you’re worried about future fraud under your identity, you can opt into the Identity Protection PIN program to get a unique six-digit number known only to you and the IRS to use when you file your tax return.

A flood of pandemic-related unemployment claims triggered mass fraud

Many state government unemployment agencies use antiquated computer systems and are understaffed. They quickly became overwhelmed as the pandemic raged on and job losses mounted.

As part of relief legislation passed in March, the federal government loosened eligibility requirements for unemployment insurance. New programs allowed self-employed and gig workers to file for benefits, in some cases requiring only self-certification. With a few stolen personal details, fraudulent claims could be filed and easily overlooked in a state system’s fraud detection process. 

In California alone, an audit showed that while the state’s unemployment agency stopped $12.8 billion in bogus payments, it has paid out an estimated $10.4 billion to fraudsters, the Associated Press reported. 

“One sign of a sham is multiple claims filed from the same address,” the AP’s Adam Beam wrote. “In one assessment, the [audit] agency found 555,000 claims associated with 26,000 addresses, an average of 21 per address.”

One reason the sheer dollar amount of fraud has been so large during the pandemic is because of the additional payouts authorized by the government, initially through the CARES Act. The federal government added $600 a week to recipients’ state benefit checks. It also extended each state’s maximum payout period by 13 weeks.

In December, several months after the bonus payout had expired, more federal legislation passed that added $300 a week to benefit checks and extended the payout period an additional 11 weeks. These benefits are being paid into 2021, so fraud claims are likely still mounting.

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