Identity theft occurs when a person wrongfully obtains and uses another person’s personal information (such as name, social security number, bank account information, etc.) in a way that involves fraud or deception, usually for economic gain. It has become the number one consumer complaint to the Federal Trade Commission for 15 consecutive years.
Businesses, government agencies, and other organizations make significant efforts to secure the personal information of customers and employees. Even though significant effort is put forth to combat identity theft, criminals are becoming increasingly sophisticated. A data breach can expose personal information to criminals causing harm to their victims. In response to such breaches, organizations often provide credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services to customers and employees whose information may have been breached.
When Identity Theft Protection Services are Tax-Free
The IRS has received questions regarding the taxability of identity protection services provided at no cost to customers and employees whose personal information may have been compromised. The IRS issued an announcement that it will NOT assert that an individual whose personal information may have been compromised in a data breach must pay tax on the value of the identity protection services provided by the organization that experienced the data breach.
Additionally, the IRS will not assert that an employer providing identity protection services to an employee whose personal information may have been breached must include the value of identity protection services in the employee’s taxable compensation.
When Identity Theft Protection Services are Taxable
The IRS also states that this tax-free provision does NOT apply to cash received in lieu of identity protection services, or to identity protection services received for reasons other than as a result of a data breach, such as identity protection services received in connection with an employee’s compensation benefit package. This announcement also does not apply to proceeds received under an identity theft insurance policy.
What if Identity Theft Protection Services are Provided before a Breach Occurs?
The IRS received comments stating that an increasing number of businesses are combating data breaches by providing identity theft protection services to employees and other individuals before a data breach occurs in order to help detect any occurrence of a breach in their information systems, and to minimize the impact of their operations.
Accordingly, the IRS will NOT assert that an individual must pay tax on the value of identity protection services provided by the individual’s employer or by another organization to which the individual provided personal information. Similarly, employees will not have to include in taxable income the value of such services provided by their employers.
Again, this announcement does not apply cash received in lieu of identity protection services or proceeds received under an identity theft insurance policy.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.