Emergency programs like the temporary Pandemic Unemployment Assistance (PUA) and permanent Disaster Unemployment Assistance (DUA) have been an economic lifeline for millions of workers who lost employment in times of crisis. The PUA program alone was a central part of the U.S. safety net during the COVID-19 pandemic. Along with the traditional unemployment insurance (UI) program, it helped reduce family economic hardship, prevent poverty, and stabilize the economy after one of the sharpest declines in employment in U.S. history. However, these programs rely on manual income verification processes and fragmented data, which contribute to equity, payment accuracy, and program integrity issues. This post explores ways we could prepare for a future recession or national emergency with access to federal tax data, if allowed per the Internal Revenue Code, retrieved from the Internal Revenue Service (IRS), and shared by the taxpayer to whom it pertains.

A Cumbersome Process for Claimants and States


Income verification is the process of reviewing financial documents and data to determine if a claimant has a sufficient employment history to qualify for unemployment benefits or to calculate the amount of such benefits. This process was a recurring pain point for claimants and states during the pandemic, and is a frequent issue for applicants of DUA. However, the Internal Revenue Service is prohibited by law from disclosing financial information for verifying income unless there is an exception in the law.  As part of our ongoing research into ways to prepare the UI system for the next crisis, we led additional interviews and prototyping to explore solutions for employment and wage verification for future mass unemployment events.


Income data plays a foundational role in ensuring the integrity of the UI program. States use quarterly wage data from employers to verify income and employment for W-2 workers. But for emergency programs designed to cover non-traditional workers—including freelance, self-employed, and gig workers who do not qualify for traditional UI benefits and are often paid with 1099 tax forms—accurate income data is not currently readily available to states from an objective or verifiable source for use in determining benefit eligibility.  In our research, state officials reported that they have to rely on claimants’ statements about income without adequate checks and balances. ’
 

  • Claimants are required to hunt down detailed income and self-employment information to substantiate their claim. Gathering and submitting the information is burdensome for claimants, particularly in a time of crisis when they may have lost everything in a disaster or be displaced from their home.
  • States often lack secure document uploaders. That means that in the case of emergency programs, many claimants have to find a fax machine, travel to the nearest unemployment office or disaster center, or send sensitive documents by mail or email (these challenges exist in regular UI program but are exacerbated in disaster situations) Claimants may submit documents multiple times hoping to expedite a response, which contributes to backlogs and processing delays. States are seeking to implement secure document uploaders for a variety of purposes in the UI programs, but the lack of this functionality is particularly felt by non-traditional workers who must submit documentation of their income (in contrast to traditional UI claimants who usually can apply on the basis of wage records on file with the state).
  • Claimants have difficulty reporting income accurately due to inadequate or confusing instructions in UI applications or supporting documentation or limited access to good records. Non-traditional workers often have irregular income and/or income from multiple sources, which makes it difficult to predict and track, especially for workers who earn primarily cash income. States need accurate income data to ensure claimants are paid benefits fairly, accurately, and efficiently.
  • States face a burdensome task of sorting and processing documents, and many states are still highly manual in their workflows. States are early in their adoption of automation which limits their ability to automate cumbersome tasks like extracting data, calculating benefits, and routing and prioritizing issues. This creates additional burden on staff to process claims accurately, and can cause delays in payments to individuals in need.
  • States don’t have authoritative data sources for verifying or crossmatching self-employment income. Staff need to review an array of income documents and have no efficient and effective way to validate those documents. Staff often need to reach out to claimants for additional information, adding further processing delays.  On top of these responsibilities, they still need to check several systems to verify eligibility and information submitted by claimants such as cross-checking for wage data for non-traditional workers who do not file quarterly reports or pay UI taxes.
  • States frequently face legal and technical barriers to data sharing, which limits their ability to use state, interstate, and federal data for income verification, including state revenue data.

These issues add up to a painful, inefficient, and costly process. These challenges could be addressed, in part, by automating income verification with federal tax data. However, as noted earlier, IRS tax return data is protected from disclosure by Internal Revenue Code Section 6103, which states that returns and return information shall be confidential except as authorized by the Code. Any exceptions to this statutory mandate must be contained in the Internal Revenue Code.


During emergencies, states do not have access to authoritative data to verify the income of non-traditional workers for the purposes of determining eligibility for UI benefits. However, the IRS collects income and employment information from individuals regardless of whether their work is covered by the traditional UI program, which would be helpful for state agencies to use in their determinations of eligibility. In our recent interviews, states continually expressed interest in this data and reported higher satisfaction with tax data for income verification than with verifying receipts and bank records.


Federal tax data could provide many benefits for emergency programs:

  • Self-employment income verification: States would have a reputable source for self-employment income data, which would help prevent fraud and ensure the right people receive the right benefit amount. Tax data provides direct evidence that claimants are tax-paying workers who have filed and paid taxes.
  • Identity verification: States could crossmatch income and identity data with Treasury sources (e.g., taxpayer names and ID numbers, risk analytics from the Do Not Pay service).
  • Reduced administrative burden: Access to federal tax data would mitigate the need for claimants to search for paperwork, try to understand and calculate their net income, and determine the best way to submit documents to the state.
  • Staff efficiencies: Tax data would decrease manual calculations, errors, and training burden for staff to understand various tax documents since the net income amount would be readily available.
  • Interstate claims: States often receive an influx of claims from out-of-state locations or counties outside a disaster area. States noted to us that tax data could help them to verify out-of-state income that would affect eligibility, reducing staff burden and helping to prevent fraud. As an example, W-2 and W-4 data could be used to validate a claimantʼs address.
     

Some Data Sharing Agreements Already Exist between IRS and Federal Agencies


The Internal Revenue Code does not currently authorize all state benefit agencies to have access to IRS return information for UI benefit eligibility determinations, including disaster purposes. However, the Department does have access to IRS return information for UI tax purposes.  Additionally, specific statutes authorize other federal agencies, including the Department of Education (Education) and the Centers for Medicare & Medicaid Services (CMS), to have access to data for specific purposes. Over the last 20 years, Congress has authorized several government agencies to access federal tax records to improve program integrity, accuracy, and efficiency in making eligibility determinations. These include:

  • CMS developed a Data Services Hub in partnership with the IRS as part of the Affordable Care Act. The Office of Management and Budget is exploring the potential for expanding the hub to programs like Supplemental Nutrition Assistance Program and Temporary Assistance for Needy Families.
  • Education has access to return information to support Federal Student Aid via the Future Act.1
  • Veterans Affairs (VA) has statutory authority2 for the use of IRS data which has allowed it to automate income verification for 94% of applications. The VA expects to use a new interface the IRS in the future, which could leverage the same technology as the Direct Data Exchange.
  • The Social Security Administration (SSA) has statutory authority through the Internal Revenue Code3 and the Social Security Act which allows it to collect W-2s and W-4s from IRS.  SSA also uses federal tax data to verify income for Supplemental Security Income and Social Security Disability Insurance.

Conclusion


To show what could be possible, the Department researched potential solutions that would use tax data if authorized.  One of these solutions demonstrated how claimants could opt into obtaining their federal tax return data from the IRS and sharing it with states directly. Our research gave us the chance to work with program experts at the state and federal level to explore the desirability and functionality required for such data sharing. As indicated in our  transformation plan Building Resilience: A plan for transforming unemployment insurance, the Department will continue to explore methods of verifying the income of nonstandard workers and work with Congress and other federal agencies to increase the tools available to state UI agencies.
 

 

1 Internal Revenue Code 6103(l)(13).
 2 Internal Revenue Code 6103(l)(7)
 3Internal Revenue Code 6103(l)(1) and (l)(5)