Identity theft is a growing problem for all businesses that regularly deal with customers’ personal information. According to statistics compiled by the Bureau of Justice Statistics, 16.6 million people in the United States were the victims of identity theft in 2012.
Businesses that have experienced a breach of customer or employee personal data often offer victims free enrollment in an identity theft protection service following the breach. There is a value associated with these services that arguably could be considered taxable compensation to the victims. However, in Announcement 2015-22, the IRS has clarified that it will not treat identity theft services provided to victims of a data breach as an item of taxable income. It also clarified that no additional information reporting on Form 1099-MISC, “Miscellaneous Income,” or Form W-2, “Wage and Tax Statement,” is required for identity theft services provided to victims of a data breach.
The guidance is a welcome clarification on the issue and will help to minimize the effects of identity theft for identity theft victims and the affected companies.