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Saturday August 22, 2015

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Identity Theft Services Tax-Free

In Announcement 2015-22 the IRS stated that receiving identity theft services will not lead to harmful tax consequences.

Identity theft “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.” Since 2000 the top consumer complaint to the Federal Trade Commission (FTC) has been identity theft. In 2012, the last year with government statistics, there were 16.6 million American victims of identity theft.

While major corporations expend substantial funds to protect data, there still have been data breaches. When there is a breach, the corporation may offer various services to those who have been affected. These identity theft services may involve substantial costs to the organization that suffered the data breach.

The IRS stated, if you have “personal information” that is “compromised in a data breach,” you are not required to “include in gross income the value of the identity protection services provided.” Additionally, the IRS will not assert that a data-breach employer providing identity protection services to employees must include the value of the identity protection services in the employees' gross income and wages.

There is one exception to the tax-free benefit. If there is a cash award to the identity theft victim, that amount is not excluded under this provision.

The Announcement does not apply to benefits received through an insurance company or to identity theft benefits provided as an employee's compensation benefit package.

Editor’s Note: The tax-free treatment of identity theft services is logical. If there is a data breach, the services are intended to restore a person to his or her normal circumstances. In most cases even these benefits will not improve the situation for a victim. At best, he or she will suffer no further damage. Because there is no net benefit, the restorative services should not be taxable.

Cadillac Healthcare Excise Tax May Lead to HSA Plans


In 2020 there will be a 40% excise tax paid by health insurance companies on expensive or “Cadillac” healthcare plans. The tax applies if the plan cost is over $10,200 for individuals or $27,500 for family coverage. Members of both the House and Senate have proposed repealing the 40% excise tax, but no bill has passed.

A recent survey by the National Business Group on Health suggests that most employers are concerned but not yet taking action. Because growth in the cost of medical care exceeds the 2.4% inflation factor for the excise tax floors, many plans may be subject to the tax. When asked if they thought that their company plans would be subject to the excise tax by 2020, 72% of business executives surveyed stated that their healthcare plan would exceed the excise tax limits.

As a result, employers are exploring options to reduce costs. Many will convert to healthcare savings account (HSA) plans. Others may initiate wellness programs or consumer-directed plans.

National Business Executive Brian Marcotte announced the survey results at a Washington meeting. He noted, “Companies are looking to see what's going on in Washington, and they see some energy around possibly repealing the excise tax."

Published August 14, 2015

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