IRS expands favorable treatment of employer-provided ID theft services
TAX ALERT |
In Announcement 2016-02, the Treasury Department and the IRS expand the favorable tax treatment provided for victims of identity theft in Announcement 2015-22 (see IRS asserts no taxable income from certain identity theft protection) to include identity protection services provided to employees or other individuals before a data breach occurs.
The previous guidance in Announcement 2015-22 provides that when an organization is the target of a data breach, the value of the provision of credit reporting and monitoring services, identify theft insurance policies, identity restoration services, or other similar services (hereinafter referred to as identity protection services) to the customers, employees or other individuals impacted is not includable in the gross income of the impacted individual.
On Dec. 30, 2015, in response to comments on Announcement 2015-22, the IRS released Announcement 2016-02, which extends the provisions of Announcement 2015-22 to include identity protection services provided to employees or other individuals before a data breach occurs. As with Announcement 2015-22, the following provisions apply:
- The individual does not have to include in gross income the value of identity protection service provided by the individual’s employer or by another organization to which the individual provided personal information.
- An employer providing identity protection services to its employees does not have to include the value of the identity protection services in the employees’ gross income and wages.
- The value of the identity protection services provided does not have to be reported on an information return (such as Form W-2 or Form 1099-MISC) filed with respect to individuals.
It should be noted that the tax treatment described above does not apply to cash received in lieu of identity protection services or to proceeds received under an existing identity theft insurance policy.
The guidance provided in Announcement 2016-02 is a logical extension of the provisions provided in Announcement 2015-22. As identity theft continues to be a growing problem, companies that provide this proactive protection benefit welcome the favorable tax treatment of the benefit for their employees.