Identity theft is a continuing concern throughout the United States. According to a study by Javelin Strategy & Research, 12.7 million taxpayers were the victims of identity theft in 20141. In response, businesses and other organizations are frequently offering identity theft protection services to secure the personal information of their employees and customers. Identity protection services include credit reporting and monitoring services, identity theft insurance policies, identity restoration services, and other services designed to prevent and mitigate further potential losses due to identity theft. Since these services are provided at no cost to the taxpayers, the question raised is whether these services should be taxable to those who receive such services.
To address this issue, the IRS recently provided guidance in Announcement 2015-22 for the tax treatment of identity protection services. The announcement states that the IRS will not require taxpayers to include the value received from identity protection services when taxpayers are victims of a data breach. It further states that the IRS does not require employers, who provide identity protection services to employees as a result of a data breach, to include the value of the services in the employees’ wages or W-2s. The announcement goes on to clarify that if the value of the services is provided for reasons other than a data breach (such as identity protection services received in connection with an employee’s compensation benefit package) or taxpayers choose to take cash in lieu of the identity protection services, that value is taxable to the taxpayers. Also, this announcement does not apply to proceeds from an identity theft insurance policy, since a previously existing law governs insurance policy proceeds.
Please note that Announcement 2015-22 is the initial guidance on the taxability of identity theft protection services, and additional guidance will most likely be forthcoming. In addition, this guidance specifically governs the federal income tax treatment and does not necessarily govern the taxation of this benefit for state income tax purposes. Please consult your tax advisor to determine how the receipt of identity theft protection services will impact your state income taxes.
1Al Pascual and Sarah Miller. “2015 Identity Fraud: Protecting Vulnerable Populations" (March 2, 2015)