The Looming AUR Disaster from Fraudulent Unemployment Insurance Claims

A story I saw from a Sacramento television station noted that California’s Employment Development Department (EDD) processed millions of fraudulent unemployment insurance claims; indeed, EDD has no idea how many fraudulent claims were filed. EDD is now mailing out Forms 1099-G to note the unemployment paid (unemployment is taxable on the federal level). The Sacramento television station notes that individual who receive a fraudulent 1099-G from EDD should file a fraud claim with EDD so that (hopefully) EDD will issue a corrected 1099-G showing $0 paid in unemployment. Given it’s next to impossible to call EDD and reach a human, I wish you the best of luck in that.

But the story misses the point: Few, if any, of the fraudulent 1099-G’s will be received by the true holder of the social security number. Most of these fraudulent unemployment claims were filed with phony addresses, so the erroneous 1099-G’s being mailed out will be returned to the EDD.

Instead, what’s going to happen is that about 15 months after John & Jane Doe file their tax return (correctly noting their income), the Does will receive an Automated Underreporting Unit (AUR) notice alleging that they didn’t include their unemployment benefits from the EDD on their tax return. The Does will have to write to the AUR unit noting that the information is false. Will the AUR unit realize the issue? The AUR unit does a good job when you point out that the income was reported on the return (and the computer simply missed it). In my experience, the AUR unit does a poor job when you’re trying to show a tax form is wrong: proving a negative is difficult.

I suspect that non-Californians will have an easier time dealing with this issue than Californians. The AUR unit is far more likely to believe that the Does, living in (say) Illinois didn’t receive unemployment from California.

And it’s not just California that was victimized by this fraud. There were news stories of it here in Nevada, and I assume that other states were impacted, too. The fraud will likely lead to a lot of AUR notices in late 2022 to 2023.

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