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Value of Identity Protection Services Excludable from Gross Income.

(Parker Tax Publishing September 7, 2015)

The IRS has stated that it will not require an individual whose personal information may have been compromised in a data breach to include in gross income the value of identity protection services provided by the organization that experienced the breach. The IRS will also not require these amounts to be reported on an information return filed with respect to such individuals. Announcement 2015-22.

Identity theft, also known as identity fraud, occurs when a person wrongfully obtains and uses another person's personal information (for example, name, social security number, or banking or credit account numbers) in a way that involves fraud or deception, typically for economic gain.

The IRS notes that identity theft is a growing problem in the U.S. and has been the number one consumer complaint to the Federal Trade Commission for fifteen consecutive years. The Bureau of Justice Statistics estimates that 16.6 million people were victims of identity theft in 2012, the latest year for which data is available.

In response to a data breach of an organization's recordkeeping systems, the IRS said, 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.

The IRS has announced it will not require an individual whose personal information may have been compromised in a data breach to include in gross income the value of the identity protection services provided by the organization that experienced the data breach.

Additionally, the IRS will not require an employer providing identity protection services to employees whose personal information may have been compromised in a data breach of the employer's (or employer's agent or service provider's) recordkeeping system to include the value of the identity protection services in the employees' gross income and wages.

The IRS will also not require these amounts to be reported on an information return (such as Form W-2 or Form 1099-MISC) filed with respect to such individuals.

The IRS stated that the announcement 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. The announcement also does not apply to proceeds received under an identity theft insurance policy, because such treatment is governed by existing law. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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