Home > Personal Finance > 1099-C Wrong? Taxpayer May Pay With An Audit

Comments 0 Comments

Taxpayers who get a 1099-C listing cancellation of debt income have enough to worry about. Their main concern: “Do I have to pay taxes on the reported amount?” They shouldn’t have to worry that a lender’s sloppy practices could also be setting them up for an audit. But that’s precisely what may happen when lenders send out 1099-C’s that are wrong and won’t correct them.

This isn’t a far-fetched scenario, unfortunately. There are a variety of problems taxpayers have raised in comments to my previous stories. They’ve told us they are getting 1099-C’s for:

  • Debts that were long ago discharged in bankruptcy, but the lender is claiming there is no record of the discharge.
  • Homes that were foreclosed, but the “fair market value” listed on the form is way off.
  • Very old debts that should have been reported as cancelled many years ago.
  • Debts that include inflated fees or other charges that cannot be accurately accounted for.

[Related Article: 1099-C: The Worst Tax Mess of the Year?]

What If the 1099-C Form You Receive Is Wrong?

Scott Estill, a former IRS Senior Trial Attorney tax attorney now with Estill and Long LLC, explained what may happen if a 1099-C is wrong:

If a lender issues a 1099-C that is wrong and refuses to correct it, I would advise the taxpayer to correct it himself or herself so that the return contains accurate information.  The problem thus occurs because the information the taxpayer reports does not match the 1099-C and thus the chances of an audit are great in this situation. As such, the taxpayer will need to attach supporting documentation to the tax return showing the discrepancies and what was done to resolve them and prepare an accurate return (if the return does not match the 1099 and the IRS wants to audit this- the supporting documentation may help explain what was done and avoid an audit).

Anytime a taxpayer needs to reconstruct records to make them accurate, they should keep good notes of who they talked with at the lender (names, dates, substance of conversation) for proof if audited.  The taxpayer may need to get an appraisal done (if the fair market value of real estate is disputed on the 1099-C) or obtain other documentation depending upon which part of the 1099-C was wrong. The documentation should let the IRS know of the nature of the discrepancy and what the taxpayer did to try to resolve it. Other than this and trying to get the lender to make the necessary corrections, there isn’t much a taxpayer can do to fix the situation! But if questioned by an IRS employee, the taxpayer can say that they did not file the 1099-C that was reported because it was inaccurate- and the IRS wouldn’t want us to file an incorrect return, would they?

Unfortunately some of the taxpayers who are getting these inaccurate forms no longer have documentation to back up their side of the story. Think about it. Would you be able to dig up documentation of a debt wiped out a decade ago? I’m a paperwork packrat, but I’d have trouble pulling out ten-year-old account information.

And don’t lenders have some responsibility here? Mike wrote to us about a 1099-C he received from his bank. The bank had waived overdraft fees incurred when he had a run-in with a payday lender. Even though the fees were questionable to begin with, and the bank agreed to waive them, the bank sent him a 1099-C, five years after the fact. He asks,

Can I 1099-c them back or sue them for it?

It’s a good question. But getting an answer may be costly.

Image: Warner Brothers

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team