Hackers took their Middle Class Tax Refunds and now victims are getting a tax bill

SAN FRANCISCO (KGO) -- Many Californians are reporting that scammers drained their inflation relief debit cards before they could use the money. What's worse? They're now finding out they may have to pay income taxes on the money they never received.

The state gave out these Middle Class Tax Refunds to offset high inflation and gas prices. Now, some say they would've been better off without the payments in the first place.

"It would be adding insult to injury," Tom Koerber of San Rafael said. He got a $700 Middle Class Tax Refund loaded on a debit card, but scammers got it before he could use it.

RELATED: Here are the most frequently asked Middle Class Tax Refund questions

Now, the federal government may tax the money he never got.

"It wiped out my complete card. Wiped it out. I was like, 'Oh my God. I got scammed,'" said Koerber.

The same thing happened to Elizabeth Webb of San Francisco. Both just received a 1099 tax form saying they must report the payments as income on their federal returns. And they're not alone.

"I tried to use my card and all the funds are gone," said Nadia Flores.

RELATED: Couple tries everything after ATM 'eats' their $700 inflation relief debit card

Flores and her family received a debit card last fall, loaded with $1,050. They were saving it for Christmas, but as the card sat in a drawer, hackers drained all but $4.

"What happened to the rest of my money?" said Flores. "It's upsetting. It's very upsetting."

The money was gone, but the family did get a 1099 tax form. It means they must report the stolen money as income and may have to pay federal taxes on it -- as much as $250 out of their own pocket.

"I never got the money," said Flores, a Pomona resident who found 7 On Your Side's stories about the scams and reached out. "And you still want me to pay for something I didn't get?"

RELATED: Cash in your CA inflation relief cards ASAP before scammers get it, officials say

Flores and her family of four were already struggling to make ends meet before they received the debit card that was supposed to provide inflation relief. She provides the only family income, commutes 60 miles to work and strains to afford gasoline and tripled heating bills.

They were counting on the $1,050 to help. Instead, the money was stolen and they must find $250 for possible taxes.

"Why did they send me a card and before I could use it, somebody else could use it and now I have to pay taxes?" said Flores incredulously.

Across the state, folks who never got to use their Middle Class Tax Refunds are getting 1099 forms anyway, saying they could owe taxes on the stolen funds. But will they?

RELATED: Scammers drain growing number of Middle Class Tax Refund cards

"Believe it or not, the IRS does follow common sense lots of times," said Norman Golden, an IRS enrolled agent.

Golden says victims may find sympathy in an unlikely place -- the IRS. He says the feds are aware of the widespread reports of fraud on these debit cards, thanks in part to news stories like this one.

"The fact that KGO-TV is broadcasting this, they're well aware of it. So you're doing, you're doing a public service by reporting on this," said Golden.

RELATED: Scammers drain Middle Class Tax Refund debit cards without security chips

Golden says the IRS could grant tax relief for those who never actually received that income.

"These aren't isolated cases. This is a systemic problem affecting many, many people," Golden said. "It's one thing if you say your card was stolen and you're the only one, but if there's tens of thousands of people who said, 'I got the card, but it was blank. And it was hacked.' This is common knowledge and the IRS would be aware of these complaints."

So, if you got a 1099 for money you never received, he says, report the income on your tax return, but ask to "back it out."

"I would exclude it under the provision that they didn't actually receive the money," said Golden.

RELATED: Accidentally throw out your Middle Class Tax Refund debit card? Here's how to get a new one

Some critics say the Franchise Tax Board failed to adequately secure roughly $5 billion issued on these debit cards.

"This is one of the issues that the Franchise Tax Board is currently dealing with. I know, they're getting slammed for not having sufficient safeguards," said Golden.

The Franchise Tax Board won't reveal how much money scammers may have stolen off the debit cards, but says fraud is "well below 1%" of the total payments -- no comfort for taxpayers.

"Inflation relief, California style," said Elizabeth Webb.

As reported earlier, the IRS is still deciding whether or not to tax any of these Middle Class Tax Refunds -- whether you got the money or not. A decision is expected by next week -- and of course fraud victims should file a claim for a refund of stolen money.

How to file a dispute for unauthorized transactions

Disputes over charges on your card are filed with Money Network, the debit card company hired by the Franchise Tax Board to manage the debit card program.

Here are instructions from the Franchise Tax Board on how to file a claim for a refund of stolen money:

• Anyone reporting potential MCTR debit card fraud should call Money Network immediately at 800-240-0223, Monday through Friday, 8 a.m. to 10 p.m.
• Call 800-240-0223, enter language preference and then the card number and the PIN you set up.
• From the menu, select Option 1, "To Activate, Customer Service, and Main Menu." The balance will be stated to the caller, and they can either press 1 to repeat or 2 to "continue."
• Press 2 to continue.
• On the next menu, select Option 6 for "new or existing dispute." Caller will be transferred to an agent to intake the claim.

Note: Fraud claims will be processed as quickly as possible, but can take 45 to 90 days.

The menu will also give you the option to hear transactions that were made on your account.

Take a look at more stories and videos by Michael Finney and 7 On Your Side.

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