We are just seeing the tip of the identity theft iceberg. People who received unsolicited debit cards from state unemployment bureaus are warned that their identities have been stolen. But what about the millions of Americans who don’t know their identities have been used to collect unemployment benefits?

They will be in for a rude awakening in January when they receive a 1099-G form, detailing payout of unemployment money on which they now owe taxes!

How could that happen? Ever since the major credit breaches of recent years, identity information has been for sale on the so-called dark web.

Now it has been used to open online bank accounts to receive benefits through the less protected Pandemic Unemployment Assistance portals maintained by each state. In California, thousands of unemployment claims have been fraudulently filed in the names of prisoners, netting an estimated $400 million in benefits before the scam was uncovered!

A taxing surprise

The arrival of tax notices will be a shocking moment — and so far no government agency seems prepared to handle the wave of indignant protests the 1099s will generate. The IRS response was to pass the buck to the state unemployment departments!

I received this answer from an IRS spokesperson to my questions: “People should make sure to use whatever process the issuing agency has for correcting a 1099. If it was for benefits they didn’t receive, fraud or whatever, this means that the (issuer) will, effectively, need to issue a corrected zero-dollar 1099. That will help avoid any unnecessary follow-up correspondence (from the IRS) resulting when we match up the 1099s to what people actually report on their return.”

If the IRS thinks people can get through to their state unemployment bureaus to issue “corrected” 1099 forms, they must be living on a different planet. Many people still haven’t been able to register for benefits they deserve, or certify once approved — or report fraud. To think that state unemployment departments will recognize errors created by identity theft and then issue new 1099s is beyond unrealistic.

Do this now

If you even suspect — because of a random email or a debit card arriving in the mail — that your identity has been used by someone to collect unemployment benefits, immediately take these important steps:

1. Read and freeze your credit report. Go to AnnualCreditReport.com to get your free credit report from each bureau, and easily freeze your credit. Freezing your credit prevents anyone from opening new credit or bank accounts, unless you lift the freeze with your PIN.

Check your report for a bank inquiry, where perhaps a scammer has opened an account in your name or even taken out an SBA loan. Contact that bank and make sure no account is open.

2. Report suspected identity theft fraud to the FBI at 1-800-CALL-FBI or www.Tips.FBI.gov. And file a police report with your local police.

3. Make every effort to report suspected identity theft online to your state unemployment bureau website. Don’t wait for a callback that might never come, but use the online fraud reporting tool.

IMPORTANT: You must keep track of your efforts to report suspected identity theft. Take a picture of the computer screen (or use the PRINT SCREEN command) to save a screen shot of your online ID theft reports. That will give you some bit of proof when you are asked to pay taxes on money you didn’t get.

The most vulnerable to this scam are seniors, who may have been targeted (since ID theft includes date of birth) because they are less likely to check online financial resources. The scammers used fake email accounts and avoided paper bank notifications to avoid being detected.

But when 1099-G forms arrive in the mail by January 31, the amount owed in taxes will be significant. After all, those early benefit checks were large with the additional $600/week in federal unemployment benefits. The notices were generated by real payments to someone using your name and Social Security number, which leads to your mailing address on IRS forms. So it will be your problem to prove the fraud.

Beneath the tip of this fraud iceberg will be a massive personal finance crisis in January. And that’s the Savage Truth.