February 15, 2016

IRS Announces Expansion of Types of Non-Taxable Identity Protection

By Eugene Kim, Senior Manager, Tax & Buiness Services

IRS Announces Expansion of Types of Non-Taxable Identity Protection Tax & Business

The IRS has issued new guidance to expand non-taxable identity protection services to include those provided before a data breach occurs. An individual who receives these identity protection services isn’t required to include their value in gross income, and the entity isn’t required to consider these amounts as includible in the employees’ gross income or report them on information returns filed with respect to individuals (Form 1099). 

Statutory Background
Internal Revenue Code Section 61 generally provides that gross income means all income from whatever source derived, and in whatever form realized, whether in money, property, or services.  Only items specifically exempt may be excluded. 

Background on Identity Theft
Identity theft occurs when a person wrongfully obtains and uses another person’s personal information (e.g., name, social security number, bank or credit account numbers) in a way that involves fraud or deception, typically for economic gain.

Businesses, government agencies, and other organizations make significant efforts to secure the personal information of their customers and employees, but data breaches nonetheless do still occur.  In response to such data breaches, organizations often provide credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services (collectively, “identity protection services”) to the customers, employees, or other individuals whose personal information may have been compromised as a result of the data breach.  These identity protection services are intended to prevent and mitigate losses due to identity theft resulting from the data breach. 

Expanded Relief
The IRS has expanded the relief provisions to include identity protection services provided to employees or other individuals before a data breach occurs, citing statements received by commenters that providing such services before a data breach occurs will allow earlier detection of a data breach and minimize the impact of a breach on operations. 

The IRS stated, however, that the non-taxable treatment described above does not apply to cash received in lieu of identity protection services or proceeds received under an identity theft insurance policy. 

Should you have any questions, please contact your Marcum Tax Professional. 

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