Tax Help: How to Dispute A 1099-C Form

Problems arise when the amount reported on one of these forms is disputed. IRS instructions for Form 982, and Publication 4681 which details instructions for filling out that form, make no mention of what taxpayers should do if they believe the 1099-C they received is inaccurate.

The problem, explains Zollars, is that “the IRS locks onto the 1099 and they get blinders on, and assume it’s correct.” But he also insists that if taxpayers “cooperate with the IRS and they raise a legitimate doubt about a 1099-C, explain the situation and provide some documentation, then the burden shifts over to the IRS.” Zollars points to several Tax Court cases where taxpayers have prevailed in COD income disputes.

Both Tufts and Zollars advise taxpayers to include the amount of the 1099-C on their returns, even if they think it is wrong. Otherwise, the automated programs that the IRS uses to match information on returns to information received from lenders and employers may pick up the discrepancy and signal a problem to the IRS. “Report (the amount on the form) and then attach an explanation and back it off,” suggests Zollars.

In Anne’s case, she has written proof that creditor agreed to settle the debt in 2006. The 1099-C should have been sent for that tax year. The fact that the lender did not send one until the 2011 was not her doing. Because three years has passed since that tax return was filed, she should not have to amend her tax return from 2006 to include that income. Proving that to the IRS may be difficult, though, and will likely require Anne and her husband to hire a tax professional to help them.

What about taxpayers who defaulted on debts and never reached a settlement with creditors? It can be difficult to establish when the debt was cancelled or forgiven. In those cases, the IRS says creditors must send 1099-Cs after as many as three years of no collection activity. But it’s hard for a taxpayer to prove what happened in those intervening years.

Zollars teaches continuing education classes for tax professionals, and says these forms are creating complicated problems for tax professionals as they try to sort things out for their clients. He noted that his classes on this topic normally attract 30-35 attendees, “but this year we had 150 and had to reschedule another 110.”

Complaining May Get You Nowhere

Can you report a creditor who sends a flawed 1099-C and refuses to correct it with the IRS? You can try, but “the IRS probably doesn’t care much,” Zollars says. He suggests taxpayers instead complain to their elected officials in Washington.

Tufts, on the other hand, maintains that taxpayers may be able to take action against a company that issues an incorrect 1099-C and refuses to correct it. He says that’s especially true if there appears to be fraudulent intent.

The biggest lesson in all of this? Keep documentation of any settlements with creditors, short sales, foreclosures, or even defaulted debts for as long as possible. You never know when they may come back to haunt you. And if they do, get help from a tax professional.

Confused about how to deal with a 1099-C? Read: 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt