Don't Mess With Taxes

A record number of unemployment claims were filed due to COVID-19 layoffs. But billions of dollars of those benefits went to crooks who falsely filed for them.

The weekly jobless reports from the U.S. Bureau of Labor Statistics (BLS) are always watched closely. They're seen as a sign of how well (or not) the economy is doing.

The reports of how many people are (or aren't) looking for work have taken on added significance during the COVID-19 pandemic. The latest count was good news. BLS' Sept. 2 report showed that the United States saw the least number of new unemployment filings since March 2020.

The unemployment applications themselves also have received added scrutiny as the coronavirus opened new avenues for criminal activity.

As workplaces closed, sending laid-off employees to state unemployment offices, crooks filed false unemployment insurance (UI) claims using other people's names and information

Now, ranking Republican members of the House and Senate tax-writing committees are asking the Government Accountability Office (GAO) to launch an investigation, using Internal Revenue Service and other federal resources, into "the scope and severity of fraudulent activity in COVID unemployment insurance programs."

UI fraud's many victims: Fake unemployment filings not only cost the paying agencies, but also create a tax mess for the individual taxpayers whose stolen identities were used to make the false claims.

Since their information was used by the criminals, the unsuspecting individuals got official statements with details on the taxable benefits even though they didn't collect them.

That's meant they've had to explain the situation to the IRS and state tax collectors.

The good news for the victims is that tax and other government officials are well aware of the UI fraud spike during the pandemic. The agencies are working with unemployment identity theft victims to ensure they don't have to pay tax on income they never applied for or received.

Historic amount of UI fraud: Three GOP members of Congress, two on the House Ways and Means Committee and the other on the Senate Finance Committee, want more answers about the UI schemes that spiked during the pandemic.

The trio — Sen. Mike Crapo of Idaho, ranking GOP member on the Senate Finance Committee (SFC); Rep. Kevin Brady of Texas, ranking House Ways and Means (W&M) Committee minority member; and Rep. Jackie Walorski of Indiana, who is the top Republican on the W&M's Subcommittee on Worker and Family Support — also want to make sure that the IRS and other federal agencies are part of the probe.

They say GAO involvement is necessary because the fraud, which one recent estimate says is as much as $400 billion, involves federal funds from the Pandemic Unemployment Assistance (PUA), Federal Pandemic Unemployment Compensation (FPUC), Pandemic Emergency Unemployment Compensation (PEUC), and Extended Benefits (EB) programs.

The lawmakers want a more precise accounting of what they say, in their Aug. 31 letter to GAO Comptroller General Gene Dodaro, "appears to be the largest amount of unemployment fraud in history since March of last year."

Multi-agency investigation requested: Since currently there is no federal effort in place to formally evaluate and estimate the true scope and severity of COVID unemployment fraud nationwide, the lawmakers ask GAO to take on that task.

The accountability office's coordination is necessary, say the W&M and SFC members, because "responsibility for determining how much fraud has occurred lies the UI fraud has occurred lies scattered throughout a web of bureaucracies."

In the IRS' case, Crapo, Brady and Walorski write that since the tax agency has issued guidance essentially allowing states to zero out paid unemployment benefits that subsequently were discovered to be a result of identity theft and fraud, they are concerned about the ability of Congress to know the actual amount of unemployment benefits lost to fraud.

The IRS' participation in a GAO investigation should "provide an accounting and review of the amount of income from unemployment benefits received by taxpayers, as reported by states using Tax Form 1099-G, that have been revised due to a taxpayer claim of identity theft," write the members of Congress.

The Representatives and Senator ask that in addition to the IRS, the GAO include the Labor Department and its inspector general, the Justice Department, the Homeland Security Department and its inspector general, and various state officials and agencies in its investigation.

Ultimately, the lawmakers write, a comprehensive investigation overseen by GAO will provide Congress more adequate information with which "to assess future unemployment insurance responses to large economic shocks; and, at the same time, ensure they are not plagued by gaping security holes that allow fraudsters an open window to use to unlawfully obtained taxpayer funds."

The tax-writing committee members have asked for an initial response from the GAO by Dec. 31.

You also might find these items of interest:

• COVID-19 tax-related scams top IRS' Dirty Dozen 2021 list
• Unemployment tax troubles: wrong 1099-G amounts & benefits ID theft 
• Labor Department joins IRS in offering online resources for unemployment fraud victims

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