Citing scary facts like the 16.6 million victims of identity theft in 2012 and the recent customer data security breaches at major U.S. companies, the IRS recently announced special tax relief for identity protection services provided to individuals affected by a security breach.
Often, if a company has experienced a data security breach, it will provide certain identity protection services to affected customers and employees, at no cost. These services may include credit reporting and monitoring services, identity theft insurance policies, and identity restoration services. IRS Announcement 2015-22, which was released on August 13, provides that the IRS will not assert that identity protection services provided to customers, employees, or other individuals as a result of a data breach need to be included in the individual’s gross income or wages, nor will it assert that the value of such services needs to be reported on information returns such as Forms W-2 or 1099.
However, this tax relief only applies to identity protection services provided by the company that experienced the data breach, and only to services provided as a result of the breach. The relief also does not apply to cash that a company may provide to an affected individual in lieu of providing identity protection services after a breach, or to proceeds received under an identity theft insurance policy.