What gig workers who have been scammed must do to avoid losing even more to taxes

Greenberg said if a gig worker loses earnings through no fault of their own, “the IRS doesn’t care that he was defrauded” if the agency is not informed.

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Nina Olson, executive Director for the Center for Taxpayer Rights in Washington, and a former national taxpayer advocate for the Internal Revenue Service, said it’s important for the affected gig workers to take proactive steps to avoid tax nightmares.

Olson acknowledged that “you’re putting more burden on people who have already experienced incredible burden.” But the steps are necessary, according to her, Greenberg and other experts.

Here are the tips they shared:

Act early: Gig workers should try to act before receiving their 1099 tax forms that show annual income. If they “catch [a loss from a fraud or scam] quickly enough,” they should ask the platform to adjust their payouts on the form before the end of the year, Olson said. If the company agrees, the income shown on the form will be more accurate and the workers’ tax liability will be lowered.

Spokespeople for Uber and Instacart said the companies would make an adjustment on a 1099 if a worker asked and the company confirmed it was necessary to issue a corrected form. DoorDash, Grubhub and Lyft did not respond by publication time.

Report theft: If workers have received their 1099 forms and the stolen earnings are included in the total income shown, they should report their income as shown on the 1099 form. Then they should report the amount they lost as a “theft loss” on their tax return, according to the experts who spoke with MarketWatch.

“This is a tough situation for both sides, but especially the worker,” said Trent Bigelow, chief executive of Abound, a San Francisco-based company that helps gig platforms automate 1099 filings. “They should file a police report in case the IRS audits them and they need to substantiate their claim.” 

All the experts stressed the importance of keeping good records. When workers file their taxes and claim a theft loss, they need to make sure they can back up their claim with records of correspondence about their loss of earnings. They should take notes in discussions with representatives of the gig companies, save emails and screenshots, and be ready to produce bank statements or copies of police reports — anything that shows they did what they could to report the theft and try to get their money back.

“I’ve had some clients over the years who have experienced theft and reported it as an expense, and they were never audited,” Greenberg said. “But documentation is important” in case the IRS decides to do an audit, he added.

“The courts and law are very clear that the IRS can’t rely on a 1099 alone when alleging income,” Olson said. “If in an audit, a taxpayer comes in and reasonably provides information that shows it’s not correct, if you go to tax court, the burden of proof is on the IRS.”

Use SSN alternative: If a worker’s Social Security number was stolen as part of the scam that caused the lost earnings, that worker should use an “identity-protection PIN” from the IRS instead of an SSN, said Barbara Weltman, president of Big Ideas for Small Business, Inc., a Florida-based firm that serves small businesses and entrepreneurs.

Free help from tax professionals: If gig workers are audited, the IRS funds more than 100 low-income taxpayer clinics around the nation where they can find representation for free, Olson said. The clinics also help with education and outreach to people who speak English as a second language.

“I know they’re seeing some of these cases,” Olson said. “It’s not just gig workers — most people don’t know how to deal with the IRS when they have an audit. Have an actual tax attorney deal with it.”