According to the Bureau of Justice Statistics, about 17.6 million individuals in the U.S. were victims of identity theft in 2014. When a data breach occurs at a company, the company may offer to provide identity protection services to its customers, employees, or other affected individuals. Is the value of those identity protection services taxable income?
In Announcement 2015-22, the IRS concluded that, for an individual whose personal information may have been compromised, the IRS will not treat the value of identity protection services as gross income to that individual when provided by a company that experienced a data breach. Similarly, for an employee whose personal information may have been compromised in a data breach of the employer, of an agent of the employer, or of a service provider of the employer, the IRS will not treat the value of identity protection services as gross income to that employee when provided by the employer. Identity protection services include credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services.
In Announcement 2016-2, the IRS extended these conclusions to identity protection services provided before a data breach occurs. So, for an individual who provides personal information (e.g., the individual’s name, social security number, bank account number, or credit card number) to a company, the IRS will not treat the value of identity protection services as gross income to that individual when provided by that company before a data breach occurs. Similarly, for an employee, the IRS will not treat the value of identity protection services as gross income to that employee when provided by the employer before a data breach occurs.
As we begin the 2016 income tax filing season, it’s also important for taxpayers and tax preparers to take extra precautions regarding identity theft, tax refund fraud, and tax-related scam emails. The IRS has issued Publication 4524 on Security Awareness for Taxpayers and Publication 4557 on Safeguarding Taxpayer Data. The IRS reports that since 2013, there were 3,331 identity theft investigations initiated by the IRS Criminal Investigation division resulting in 1,976 convictions. For fiscal year 2015, their incarceration rate is 84.6% with an average of 38 months to serve. The IRS also has released as series of security awareness tax tips. Finally, certain eligible taxpayers can apply for an Identity Protection PIN from the IRS to prevent someone else from filing a tax return with the taxpayer’s social security number.
If you are concerned about identity theft or identity fraud, consider placing a security freeze on your credit file at the three major credit bureaus: Equifax, Experian, and TransUnion. For more information about this, read the recent report from the U.S. Public Interest Research Group “Why You Should Get Security Freezes Before Your Information is Stolen—Tips to Protect Yourself Against Identity Theft & Financial Fraud.” According to the report, a security freeze is the only reliable way to prevent someone from opening new financial accounts in your name.