This tax season is bringing more bad news for some victims of unemployment fraud. State officials are notifying some residents that they could face tax bills for unemployment benefits they never received.
Last spring, Eileen and Chris Barnacoat of West Townsend discovered that someone had stolen Chris’ identity and was fraudulently collecting unemployment payments. It took months to sort out. But last month, the state notified the couple to say Chris could be taxed by the IRS on the stolen benefits.
“My first thought was, ‘Oh, no, we're going to be in trouble with the IRS because we didn't do this’,” Chris Barnacoat said.
The Massachusetts Executive Office of Labor and Workforce Development wrote to the couple to say they owed taxes on more than $8,000. The couple previously had notified the state they were victims of fraud. But with the new notice, they were thrown back into the frustrating and confusing process of defending themselves.
“You know, not only would you have to be proving to Massachusetts that you didn't receive the money, but then you'd have to be proving to the Internal Revenue Service that you didn't receive the money,” Eileen Barnacoat said.
State officials estimate that Massachusetts paid out nearly $690 million in unemployment payments that were either confirmed fraudulent or potentially fraudulent between last April and January 2021. During that same time period, more than 150,000 Massachusetts residents reported to the state that their personal information was stolen as part of unemployment frauds. It’s not known exactly how many victims, like the Barnacoats, could unexpectedly face taxes because of that fraud. But tax experts are advising clients to get ahead of any tax problems.
Christopher Pulick, CPA and tax partner at Kevin P. Martin Associates of Braintree, said he knows of at least a dozen fraud victims who potentially face taxes because of it.
"We've been telling some of our clients to file with the IRS to let them know about fraud,” he said.
The state has a form that victims can request and fill out called a corrected 1099G form thatis sent to the IRS and the state, Pulick said, so victims won’t be required to pay taxes on the stolen benefits.
The Barnacoats took that step, and they say their tax issue is resolved. But they are still upset they had to deal with the fraud at all.
“[Massachusetts] and all the other states don't seem to have a really adequate system for being able to identify people that make claims,” Chris Barnacoat said.
In response to an inquiry about the high volume of illegitimate claims, the Massachusetts Department of Labor and workforce Development issued a statement to GBH News that states the department has “added protections to the process, including enhanced identity verification and authentication measures.”
State officials estimate they have recovered just about one-third of the nearly $690 million paid out to fraud scams.
