The IRS today released an advance version of Announcement 2016-2 to extend the tax treatment of identity protection services as previously provided to "compromised" persons (i.e., such services not being reportable income) to identity protection services provided to employees or other individuals before a data breach occurs.
The IRS in August 2015 released Announcement 2015-22 providing that identity protection services provided at no cost to customers, employees, or other individuals whose personal information may have been compromised in a data breach were not reportable income to these “compromised” persons. Read TaxNewsFlash-United States
The IRS and Treasury Department received comments in response to Announcement 2015-22, including statements that providing identity protection services to employees and other individuals before a data breach occurs allows earlier detection of a data breach and minimizes the impact of a breach on operations. Based on these comments, the IRS and Treasury decided to extend the relief originally provided by Announcement 2015-22 to include identity protection services provided to employees or other individuals before a data breach occurs.
Announcement 2016-2 [PDF 30 KB] provides that the IRS will not assert that an individual must include in gross income the value of identity protection services provided by the individual’s employer or by another organization to which the individual provided personal information (for example, name, social security number, or banking or credit account numbers).
Additionally, the IRS will not assert that an employer providing identity protection services to its employees must include the value of the identity protection services in the employees’ gross income and wages. The IRS will not assert that these amounts must be reported on an information return (such as Form W-2 or Form 1099-MISC) filed with respect to such individuals.
Today's IRS announcement states that any further guidance on the taxability of these benefits will be applied prospectively. It also states that this relief does not apply to cash received in lieu of identity protection services or to proceeds received under an identity theft insurance policy.
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