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Billions were stolen from unemployment coffers. Now, it's creating a tax headache for victims.

"It's unconscionable what some of these fraud rings have done. It's the worst of human beings," said one employment office director.
Image: Illustration shows cut outs of a 1099-G form and Treasury checks, while blurry people in masks wait on an unemployment line on a green background.
A variety of identity thieves and organized criminal groups have found ways to exploit the historically underinvested-in state unemployment infrastructure.Chelsea Stahl / NBC News; Getty Images

Millions of Americans are opening their mail to discover a mysterious 1099-G IRS tax form for unemployment benefits they never applied for — or received. It's the first notice many are getting that they are victims of a massive identity theft and unemployment fraud scheme that plundered pandemic emergency unemployment funds and walked away with billions of dollars in illicit gains.

The Labor Department's inspector general's office "conservatively" estimates that over $36 billion has disappeared because of improper payments for unemployment benefits. A "significant portion" is from fraud.

Because unemployment benefits are taxed as income, many questions arise for the victims. Should they include the fraudulent form when they file their taxes and pay levies on benefits they never received? Should they not include the form and risk getting in trouble with the IRS for underpaying taxes on unreported income? Or should they try to get the form fixed through already overwhelmed state unemployment offices?

Some victims discovered the deception earlier, when they were unemployed and tried to file for benefits but couldn't, because someone had already stolen them.

Danielle Hepburn, 33, of Tulsa, Oklahoma, was furloughed from her graphic design job in August. She said that when she tried to file for unemployment benefits, she was put on hold for three hours and was then asked whether she had filed back in June. She hadn't. However, someone else had, walking away with $4,200 in her name. Her account was frozen, and during the two months it took to clear things up, she received no unemployment benefits.

"It was pretty stressful," Hepburn said by phone. "I used up all my savings to pay for rent, gas, electric, utilities, credit cards, student loans."

She still has an incorrect Form 1099, which she is working with the state workforce agency to resolve.

"I think it's just crazy to think that someone is taking all this money and we have people who really need it, who are really struggling," Hepburn said.

The inspector general's report said a variety of "identity thieves and organized criminal groups have found ways to exploit program weaknesses," exploiting historically underinvested-in state unemployment infrastructure.

"They just took credentials from previous data breaches and hammered those state systems," said Eva Velasquez, president of the nonprofit Identity Theft Resource Center, which advises governments, businesses and consumers about data breaches. "States are so impacted they're having a hard time getting to legitimate requests, let alone fraud requests."

"States are so impacted they're having a hard time getting to legitimate requests, let alone fraud requests."

The crooks include international and national criminal rings, according to the Georgia Labor Department. A California rapper named Nuke Bizzle was arrested after he made a music video boasting of ripping off the state's unemployment system for $1.2 million using stolen identities.

The thieves have been indiscriminate, exploiting the Social Security numbers of everyone from governors to teachers to the unemployed, even people working for the IRS.

"I've been at my job 16 years. I've never been in Ohio all my life," Theodore Taylor, 34, an IRS revenue agent from Philadelphia, said by phone, referring to a bogus claim made in another state under his name. "It's kind of weird. You have the address to an individual person in Pennsylvania and a person in Ohio. How did you get my info in Ohio?"

Taylor said he was worried that the incorrect 1099 could cause his return to be flagged for review or that the extra income from the form would nudge him into a higher tax bracket.

The IRS recently added guidance telling filers not to include the erroneous 1099 and to file their taxes as they would otherwise.

Filers should also check their earnings records with Social Security by logging into or creating a My Social Security account and then checking their statements, at If items need to be corrected, they can call Social Security at 800-772-1213 or contact a local office.

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Consumers should also contact their state unemployment agencies to flag the fraud for investigation and eventually have their 1099s corrected. They should try to use email or online systems, because hold times can be several hours.

They should also shore up their stolen identities. The Federal Trade Commission has a resource site for people to report identity theft and develop recovery plans.

As with many other emergency government relief programs, the framers of the emergency CARES Act program passed in March had a terrible choice, with life-or-death consequences. They could draft a system that quickly reached those most in need but that would have significant leakage — or they could design a tight program that went only to the most deserving and risk not reaching enough people quickly enough. They went with the former.

The amount of available unemployment money made the program a juicy target, especially the $600-a-week pandemic unemployment assistance program, which allowed workers to self-certify that they had lost their jobs.

"It's unconscionable what some of these fraud rings have done. It's the worst of human beings," said Shelley Zumwalt, director of the Oklahoma Employment Security Commission.

Her agency, like other state agencies, watched in the spring as more 1099 forms came through the system.

They took steps as the thieves targeted unemployment agencies across the country after the CARES Act was passed, adding cybersecurity measures, cutting off banks and financial service firms where money was fraudulently being redirected, and setting up a victims' hotline.

But they had to keep sending out the 1099 forms, even though they knew some were erroneous.

"If there are fraudulent claims that haven't been reported to us and haven't been identified in investigation, we are obligated to send them out" by a certain date, said Zumwalt, who had harsh words for the thieves.

"Fraudsters are taking advantage of people who are utilizing the system and trying to take the next step to find re-employment," she said. "From a human standpoint, I don't know if 'anger' is the right word."

Velasquez said that if the thieves are domestic and they are caught, the money can be clawed back. "If they're out of the country, they've likely already moved the money," she said. "It's a loss."