The Pandemic Created a ‘Perfect Storm’ for Unemployment Fraud. Here’s How You Can Stay Protected

A photo to accompany a story about unemployment claims fraud SDI Productions / Getty Images
A "surge" in fraudulent unemployment claims since the start of the pandemic is culminating during this already complicated tax season, as some filers discover their information has been used to previously file fraudulent claims.
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A rise in unemployment fraud is complicating an already-fraught tax season for many taxpayers.

Since the start of the pandemic, states have experienced a “surge” in fraudulent unemployment claims using information gained from data breaches in years prior, according to the U.S. Department of Labor

Because unemployment insurance is considered taxable income, more victims are only now beginning to discover their own information was used to fraudulently claim benefits, as they receive tax forms and file their own returns.

“It’s just absolutely skyrocketed,” says Eva Velasquez, CEO of the Identity Theft Resource Center (ITRC), a national nonprofit which supports victims of identity fraud.

Here’s how you can find out if your information has been compromised, and what you can do if it has:

How to Spot Potential Unemployment Fraud 

Over the past year, a few common situations alerted many victims that their information was used for false unemployment claims: 

  • Inability to file a legitimate claim because the system reported they were already receiving payment
  • Unexpected payments or mailed notices from state unemployment offices
  • An employer was contacted for more information by state unemployment offices

But the start of tax season has shed new light on the scope of these fraudulent claims. Now, some taxpayers are receiving Form 1099-G (the tax form used to report unemployment compensation) for unemployment benefits they never received or claimed.

“Box 1 on this form may show unemployment benefits you did not receive or an amount that exceeds your records for the unemployment benefits you did receive,” the Department of Labor website states. “The form itself may be from a state in which you do not live or did not file for benefits.”

Expect More Fraud to Come

Some victims may not even be aware of fraud until the IRS notices a discrepancy in their filed tax returns. In some cases, identity thieves may circumvent any connection to your real contact information and receive the forms themselves.

Some people will file their taxes and think everything is fine, Velasquez says. “And then as 1099-Gs are filtering to the IRS [from state labor departments], the IRS receives their tax return, reviews it and says ‘You have unreported income, and you need to pay taxes on this.’ And that’s how some people are going to find out in the future.”

What to Do if You’re a Victim of Unemployment Fraud

  • Report the fraud. As soon as you discover your information is being used to fraudulently claim benefits, report it to the state in which the claim was filed. The Department of Labor website has a directory with contact information for reporting fraud in each state. You should also request a corrected 1099-G; this corrected form should also update your record with the IRS.
  • Only include payment you received on your tax return. When you file your tax return, only include information regarding benefits you were paid. You do not need to wait for the corrected 1099-G to file.
  • If you already filed, don’t file an amended return. The IRS says it will issue additional guidance for fraud victims, but advises against filing an amended return in the meantime.

How to Protect Yourself from Unemployment Fraud

  • Freeze your credit. Freezing your credit prevents anyone — including you — from opening a new loan or line of credit until you request a thaw. A credit freeze is a free service, but you’ll need to contact each of the three credit bureaus (Experian, Equifax, and TransUnion) individually to make the request.
  • Monitor your credit report. Check your credit regularly for any suspicious activity or accounts you don’t recognize. You can access free weekly credit reports from each of the three credit bureaus via AnnualCreditReport.com through April 2022.
  • Opt into the IRS Identity Protection PIN program. An IP PIN is a six-digit number the IRS uses to verify your identity and prevent identity thieves from filing fraudulent tax returns in your name.

How the Pandemic Accelerated Unemployment Fraud

While unemployment fraud has skyrocketed in just a few months, the conditions that make it such a lucrative scheme have been in the works for a while. 

When the pandemic began, it set off a “perfect storm” of circumstances that resulted in the surge, Velasquez says. 

Identity thieves use personal information gained through past data breaches to file false unemployment claims, the Department of Labor reports. And over the past decade, the volume and spread of data breaches has grown, exposing millions of Americans’ personal information to potential theft. 

Between March and October 2020, state Departments of Labor paid out more than $5.4 billion in potentially fraudulent unemployment benefits, according to a February report by the Office of the Inspector General. But the OIG expects that number is actually much higher.  

Velasquez says unemployment fraud in particular wasn’t as popular before because it wasn’t particularly lucrative. But when you combine more money flowing into the system through federal extended benefits with the antiquated systems many state unemployment offices operate on and a rush to try to get as many legitimate claims filed as possible, unemployment fraud becomes much more appealing for identity thieves. 

But even for victims, the risk doesn’t end with fraudulent unemployment claims. Once identity thieves have your personal information, you’re more at risk of multiple types of identity fraud. 

“If they are able to apply for government benefits in your name, they have all of the data that they need to apply for a loan or a mortgage or a credit card in your name,” Velasquez says.