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Taxpayer v. IRS: 3 Real-Life Stories When Taxpayers Won

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When Mary Catherine Fontenot received a 1099-C form in the mail listing almost $30,000 in canceled debt income, she was alarmed. Would she owe taxes on all that income? But then she went into high gear and began researching her options. She came across a story about how discharged student loan debt can trigger a big tax bill on the Credit.com blog and wrote in the comments:

Do I have to file the 1099-C I received for $29,535? My student loans were discharged due to total disability and I don’t file taxes because Social Security is non-taxable….HELP!!!

Like many people who are no longer able to work due to total disability, Mary Catherine is on a limited income and worried there was no way she could pay the tax debt that would result if she had to include that amount in her taxable income.

Fast forward a few days and she had good news to report. Her research had paid off:

I stumbled on these same articles and looked up what the IRS calls ‘insolvent.’ I downloaded publication 4681 and did the insolvency worksheet, thus, finding out I qualify as insolvent!

She initially tried to get free help filling out Form 982 from an IRS-certified volunteer, but when they were unable to help, she turned to a tax preparation services and writes:

AARP couldn’t help me, I had to go to H&R Block in order to (fill out the paperwork to claim) insolvency. It cost me $157.75 but it worked; I don’t owe anything to the IRS! I’m very proud of myself. Thank you for your insight, it made me pursue what I thought would be the case regarding erasing my debt.

Mary Catherine’s story is inspiring, especially in light of the many complaints we have received from consumers who are struggling to understand how to deal with 1099-C forms they have received. Many of these readers are worried, and rightfully so, that debt problems they thought were finally behind them will come back to haunt them in the form of a debt to the IRS.

Don’t Back Down

Another reader who goes by the screenname “Dan” shared on the Credit.com blog how he fought back when he was sent a 1099-C for a very old debt:

I was able to get a couple of these resolved through the U.S. tax court.  It’s kind of a pain, but here’s what I did on one of the 1099-Cs I received.  I had a car repossessed in 2000, and after the bank auctioned the car off there was a difference of $12,000. They didn’t send me a 1099-C till 2011.

So I went ahead and filled my 2011 taxes ignoring the 1099-C. After a couple months I received a  ”statutory notice of deficiency” or its also called a 90-day letter. Now you have 90 days to petition the U.S. Tax Court, which I did…They settled with me without going to court after I explained that the bank didn’t follow the proper rules for filing a 1099-C. They were both done under the Court’s simplified small tax case procedure and cost $60. It’s a pain, but it seems to be the easiest way to beat a 1099-C.

A Fresh Start After Tax Liens

And it’s not just 1099-C problems that readers are tackling with success. Another reader who goes by the screenname “Dennis,” shared how he was finally able to get a tax lien removed from his credit reports thanks to the IRS Fresh Start initiative :

Had my lien removed immediately in 2011 (and) had zero problems doing it. I sent the forms to the Taxpayer Advocate folks and they handled it for me. It was new to them.

It was a simple process. The IRS sent me many copies (of the release) to send to my credit agencies and such. I also went to my local courthouse to get it marked as withdrawn on my local records as well. Process took about a month or so.

He has advice for other taxpayers who may be trying to resolve tax liens or other issues with the IRS:

Just HANG onto the copies for life. Never know when you will need them! When I got my tax lien back in 2005 it was because I didn’t file my taxes. I did my taxes and ended up getting all the money back from the IRS, (plus) interest so I hated it being on my report.

If you’re fighting a tax problem, you may feel like David up against Goliath. But we know how that story ended. Hopefully your battle with a tax issue will end in victory as well.

Image: iStockphoto

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  • Backed up Big

    Just got 1099c for five credit cards, I had filed a Chapter 13 bankruptcy in Jan 2008, it’s now 2014. They all come from eCast corporation, totaling 40 thousand give or take. My chapter 13 was dismissed. I couldn’t pay the amount due to the trustee. That was in April 9 2010. Due I have to pay tax on this as income?

    • http://www.Credit.com/ Gerri Detweiler

      If your debts were not discharged in bankruptcy, you don’t qualify for the bankruptcy exclusion. However, you may qualify for the insolvency exclusion. The worksheet is in IRS Publication 4681.

  • Sean Harris

    i have been paying my student loans and yet i have received a 1099-c that basically wipes away any refund that i would have been getting. and the student loan is 4 yrs old. and i havent missed a payment. It just doesnt seem fair.

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