Tax Help: How to Dispute A 1099-C Form

In 2006, “Anne” and her husband negotiated a settlement on credit card debt of $7,500 with one of the country’s biggest banks for roughly $2,900, wiping out just over $4,500 in debt. But just recently, the couple received a 1099-C from the credit card issuer reporting $16,000 in cancelled debt for the 2011 tax year. Both the amount and the dates are wrong, contends Anne (which is not her real name). Even though she has a copy of the settlement letter from the bank spelling out the terms of their agreement six years ago, a bank representative refuses to correct the 1099-C, stating that her husband had a separate credit card debt that triggered the form. Anne says that’s not true. “What can I do,” she asks?

Her story raises and important issue: what are taxpayer’s rights when lenders send 1099-C forms that are in dispute?

Start by trying to get the company that issued the 1099-c to correct it, advises Scott Tufts, a board certified tax lawyer with the Tufts Law Firm in Maitland, Florida. “The smartest move is to go to the source, even through the bureaucracy of the company. Document your reason for disagreement with the form,” he advises.

But as Anne’s story illustrates, getting through bank bureaucracy doesn’t always work. She said that after the bank representative refused to help, she told him she would be hiring an attorney to help her. “He ‘transferred’ me to another department, and the phone disconnected!” she told us in an email.

“What the IRS tells you to do is to call the bank to get it corrected but if you’ve ever talked to the bank, you know how far that’s going to go,” says Edward Zollars, a CPA and partner with the tax practice of Thomas, Zollars and Lynch in Arizona. “It’s kind of a mess,” he warns.

Cancelled Debt Isn’t Always Cancelled

I’ve written a series of articles about 1099-Cs and 1099-As, but to recap, these forms are used by lenders report cancellation of debt (COD) income to the IRS. The IRS generally considers cancelled debt to be income and it’s up to taxpayers who receive these forms to either include that amount in their income when filling out their tax returns, or demonstrate to the IRS why the amount should be partially or completely excluded.

The term “cancelled debt” in itself may be misleading. While these forms are sent to consumers who have negotiated settlements on debts for less than the full balance, or who have negotiated short sales on their homes, the IRS also requires that lenders notify them when there has been no significant collection activity on a debt for 36 months. The creditor may still decide to try to collect the debt at a later date, even though a 1099-C has been sent.