Along with millions of Americans who lost their jobs in 2020 and filed for unemployment benefits, the state agencies that administer the payments have been hit with an unprecedented wave of fraud.
"What we've seen is just a huge increase in a more organized, more sophisticated type of fraud," said Jon Coss, vice president risk, fraud, and compliance for Thomson Reuters.
The U.S. Department of Labor's Office of Inspector General said in March that $89 billion in pandemic unemployment aid could be paid improperly "with a significant portion attributable to fraud."
Before the pandemic, most fraud and other improper payments were individual cases involving one or two individuals, but that's changed now, according to Coss.
"That's really been replaced with very organized things," he said. Those include identity theft, the creation of fake "synthetic identities" for which claims are filed, claims filed from 160 different countries, and operations that are filing thousands and thousands of false claims. Coss said he has seen as many as 5,000 claims filed that correspond to a single address, a red flag indicator of widespread fraud.
For example, fraudsters are creating fictional companies and then filing unemployment claims in the names of employees — based on stolen or fictional identities — for workers alleged to have been laid off by those companies.
Ripe for fraud
Coss and others say the massive, large-scale fraud is the result of a confluence of factors.
"All of a sudden, the checks and balances have gone out the window — and if you don't have those in place, you're going to be vulnerable," said Howard Silverstone, CPA/CFF, director at Forensic Resolutions in the Philadelphia area. "You have this flood of unemployment claims, but the company may not even know who the 100 people they laid off were if they employ hundreds or thousands of people. There's nothing to suspect. They may not know the claim is not legit."
First, there are billions of federal dollars going into the system. States face political pressure to approve unemployment benefits quickly, but their computer systems — and staff — have been overwhelmed.
News reports of people filing for benefits and then waiting weeks or months for aid — and often unable to reach a person at the unemployment agency — have amplified pressure on states to approve claims quickly. Most state systems couldn't handle the skyrocketing numbers of unemployment claims that came in the first few months of the pandemic, opening the door for more widespread fraud.
"When we hit 16% and then 24% unemployment last April, the systems crashed," said Brian Sanvidge, who leads regulatory compliance and investigations for New York-based accounting firm Anchin and previously oversaw unemployment fraud investigations for the state of New York during his time as inspector general at the New York State Department of Labor. "They couldn't handle it."
Stolen identities
Identity theft, Sanvidge said, is a big part of the problem. In fact, he received a debit card for unemployment benefits from the state of Illinois.
"I have to call the state and say, 'Not me. I'm a principal at Anchin. I didn't apply'" for unemployment assistance, he said.
He's not the only one. In one case, Ohio Gov. Mike DeWine — along with his wife, Fran, and Ohio Lt. Gov. Jon Husted — received notices from the state that they had filed unemployment claims.
These fraudulent claims could point to other issues, such as compromised data leaks from a company or vendors.
"So, where did the fraudster get this information from? How does someone know who your employee is and to file a claim under that name?" asked Silverstone. "If you use an outside service for payroll and they have the information, are they leaking it? Or do they have hundreds of clients who are dealing with this same issue right now and are overwhelmed?"
Over the last several years, data breaches at businesses, government agencies, hospitals, and other organizations have spilled millions of Americans' identities onto the dark web, where fraudsters can purchase them and use them to file false unemployment claims.
Role of employers
Employers play a key role in stopping fraud, Sanvidge said.
"The system is designed so that the employer verification is the stopgap to fraud," he said.
When a worker who has been laid off files for unemployment benefits, Sanvidge said, the former employer is notified. If that worker hasn't been laid off or was never an employee — likely scenarios when fraudsters use stolen identities to file a claim — the employer is supposed to notify the unemployment agency.
Luis Rivero, CPA, director of tax at Miami-based Taxfyle, an online tax filing company, said that if an employee's or former employee's identity is used for a fraudulent unemployment claim, that person could have other problems.
"You should advise your employees or former employees that this is identity theft and that if someone can claim fraud through one method, it's likely that there are other types of fraud that could be or are occurring right now," Rivero said. "Reaching out to the credit bureaus and pulling tax transcripts to confirm that different fraud types haven't happened is a piece of great advice to anyone going through this."
It's important, Sanvidge said, for companies to file reports on new hires in a timely manner.
And, he said, it's critical that companies respond quickly to state notifications about unemployment claims for alleged former employees.
Sanvidge noted that with mail delivery being slower than in the past, employers should also be mindful of time constraints if they're sending or receiving information via the U.S. Postal Service instead of electronically.
Even if the unemployment claim is in the name of an ex-employee, companies should still be vigilant, Rivero said.
"If your HR department notices that an unemployment claim is coming in through a current employee, that should be an instant red flag for fraud," he said. "Even if it was a former employee, you should still be proactive and confirm that the employee asked the state for unemployment."
Silverstone agreed and added that organizations should be proactive in looking for unemployment fraud.
"Where the buck stops is wherever someone who handles employee benefits of the company, and is handling the claim, spots the fraud. Then you've got to jump all over it. Report it immediately to the state unemployment agency," said Silverstone. "With unemployment fraud, it's a check and balance where if people get benefits, the companies they work for should get a quarterly report from the state. Look at that, match it up and see if the people claiming benefits are really working for you and have been let go or furloughed."
Workers face risk
Educating employees is one of the most helpful things companies can do, Rivero said. Already, the IRS has started warning taxpayers to watch out for Forms 1099-G, Certain Government Payments, indicating they received unemployment benefits that, in fact, they hadn't.
Unemployment benefits are typically taxable — 2020's exclusion of the first $10,200 of unemployment benefits from federal taxation was a one-time exception — so people whose identities are stolen for fraudulent unemployment claims could face a higher tax bill, even if they never received the benefits, if the 1099-G goes uncorrected.
"It's always helpful to let current employees know a significant amount of fraud is currently being committed," Rivero said. "Many employees can check their IRS transcripts and know if criminals committed fraud — i.e., noticing a Form 1099-G on your transcript when you didn't claim any unemployment."
By knowing what to look for, finance departments can help combat unemployment fraud.
How to report suspected unemployment fraud in your state:
Freelance writer Lou Carlozo contributed to this report.
— Mark Tosczak is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at Andrew.Adamek@aicpa-cima.com.
