Employment Related Identity Theft: How It Impacts Your Taxes and Income

Identity theft is a growing concern, and when it infiltrates employment, its repercussions can be particularly damaging. Employment-related identity theft occurs when someone uses your personal information to gain employment or compensation, leading to significant tax and income complications.

Understanding how this form of identity theft affects taxes and income is crucial for protecting financial well-being. Fraudulent activities can disrupt payroll records, complicate tax filing, and lead to audits and penalties.

Fraudulent Payroll Records

Fraudulent payroll records are a significant consequence of employment-related identity theft, creating financial and legal challenges. When someone uses another person’s Social Security number for employment, the victim’s identity becomes tied to the thief’s earnings, resulting in a false employment history. Employers unknowingly report these earnings to the IRS, leaving the victim potentially liable for taxes on income they never received.

These discrepancies in reported income can also affect eligibility for government benefits or financial aid, which rely on accurate income data. Victims often need to resolve these issues by proving the income attributed to them was not theirs, a process that can require affidavits, police reports, and other documentation.

Employers may face penalties for failing to properly verify employee identities. The Form I-9, used to confirm identity and work authorization in the U.S., is essential. Employers who neglect this process can incur fines ranging from $252 to $2,507 per form, depending on the severity of the violation.

Tax Filing Complications

Employment-related identity theft complicates tax filing, often resulting in victims receiving incorrect W-2 forms that report wages they never earned. These inflated income figures can lead to unexpected tax liabilities or notices from the IRS regarding underpayment of taxes.

Victims must file IRS Form 14039, Identity Theft Affidavit, to notify the IRS of the fraudulent activity. Once submitted, the IRS Identity Protection Specialized Unit investigates, but resolution can take months. During this time, victims may experience delays in receiving legitimate tax refunds. Keeping detailed records, including tax returns and IRS correspondence, is critical during this process.

Securing an Identity Protection PIN (IP PIN) from the IRS is a proactive step to protect future tax filings. This unique six-digit number, renewed annually, verifies the taxpayer’s identity. Regularly monitoring tax transcripts through the IRS’s online services can help detect unauthorized activity early.

Notice of Unreported Income

Receiving a notice of unreported income, such as a CP2000 notice from the IRS, can be a sign of identity theft. These notices highlight discrepancies between employer-reported income and the taxpayer’s declared income, often proposing additional taxes, interest, or penalties. Victims must respond promptly with evidence showing the income was not theirs.

The Taxpayer Advocate Service (TAS), an independent organization within the IRS, assists individuals struggling with these issues. TAS can help expedite communication with the IRS and resolve disputes. Taxpayers should also explore programs like the IRS Fresh Start initiative, which offers options such as penalty relief or installment agreements for managing tax adjustments.

Social Security and Withholding Mismatches

Employment-related identity theft can cause mismatches in Social Security earnings and tax withholdings, leading to financial discrepancies. When an impostor uses another person’s Social Security number, the inflated earnings record may affect the victim’s future Social Security benefits and create immediate withholding errors.

The Social Security Administration (SSA) allows individuals to address these issues by submitting Form SSA-7008, Request for Correction of Earnings Record. This ensures Social Security benefits are accurately calculated. Mismatched withholdings can also lead to IRS disputes over tax liability, requiring victims to carefully review pay stubs and withholding statements.

Potential Audits and Penalties

The consequences of employment-related identity theft can escalate to audits and penalties. Income discrepancies caused by fraudulent employment may trigger IRS scrutiny. Audits often arise when reported income doesn’t match employer-submitted data, such as W-2s or 1099s. Victims may face audits not because of their own actions, but due to the impostor’s fraudulent activities.

During an audit, taxpayers must provide detailed records, including pay stubs and bank statements, to verify their income. Resolving these discrepancies can be challenging and time-consuming. Under Internal Revenue Code Section 6662, a 20% penalty can apply to underpayments caused by negligence or substantial understatement of income, though victims can often avoid penalties by proving identity theft.

To reduce audit risks, taxpayers should regularly review their IRS Wage and Income Transcript to identify unauthorized earnings early. Employers can help mitigate these risks by strictly verifying employee identities through systems like E-Verify. Victims navigating the audit process may benefit from hiring a tax professional to ensure thorough documentation and accurate resolution.