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IRS Offers Tax Break to Victims of ID Theft, Data Breaches

According to a recent study by Javelin Strategy, in partnership with LifeLock, $16 billion was stolen from nearly 13 million people who fell victim to identity theft in 2014 - a truly frightening number.

The Internal Revenue Service (IRS) - which itself has fallen victim to a massive data breach just recently - offered a small consolation to identity theft victims this month when it announced it would not levy taxes on free identity protection or credit monitoring services offered to those victims.

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Massive data breaches and identity theft scams have been plentiful in news headlines over the past few years. The most recent high-profile victims include the federal government, CVS Photo, UCLA, Sony Pictures, Target and many more. Javelin Strategy indicates at least two-thirds of the people affected in massive breaches such as those have gone on to become victims of identity theft or fraud.

The Journal of Accountancy reports that the Federal Trade Commission pinpoints identity theft as the number-one complaint it has received from consumers for 15 years running.

In most cases of a massive data breach, the companies that have been breached have offered free identity protection or credit monitoring services, to help the victims piece back together their financial identities and protect themselves from further fraud.

Typically, such a gift - which can be valued at between $1,000 to $2,000 based on the average one-year package - would be considered income and would be taxable by the IRS.

Thankfully, as reported by news outlets such as Forbes, the IRS has offered to exempt such services from having to be reported on tax returns such as a W-2 or 1099. The IRS indicates this also exempts an employer who offers free services to affected employees from including the value of those services in the employees' taxable annual pay.

Forbes explains that people who are paid in cash as compensation after a data breach are not exempt, nor are people who are offered complimentary identity theft or credit monitoring services as part of a benefits package. In order to enjoy the tax-exempt benefit, one must be able to prove he or she was a victim of identity theft or a mass data breach.

The official announcement from the IRS is available to read on the department's website, in PDF form.

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