Personal Finance

The Little-Known Form for Avoiding a Big Tax Bill

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An estimated 5.75 million forms reporting “cancellation of indebtedness income” have been sent to taxpayers this year. But how many of these 1099-C forms are correct? Given the complaints we’ve received on our blog, we suspect the number of mistakes is significant. Here are just a few examples of some of the mistakes our readers are battling:

  • Very old debt. I had a car lease back in 1997 for a vehicle. I received a deficiency letter from the IRS stating that I didn’t claim it on my 2011 taxes. I never received the 1099 from GMAC… IRS is asking for a Fair Market Value of the vehicle that it sold for back in 1998. Like I am supposed to know that.
  • Debt due to fraud or identity theft. A friend for whom I do her taxes just received a 1099-C for $7.5K for credit card debt. She claims that she never applied for the credit card, never saw the card and never used it. She suspects that her late husband who passed away in 9/1999 applied for the card in her name after he trashed his credit.
  • Debt not owed. I have disputed the debt with the credit card company, in court twice when complaints were filed by attorneys and I maintain that I do not owe the debt. I do not owe the debt. What will happen if I simply ignore the 1099-C when I file my taxes?

Normally, when you receive a 1099-C, your goal is to find out whether you qualify for an exclusion or an exception that will allow you to avoid including this amount in your taxable income. You do that by reviewing the exceptions and exclusions described in Publication 4681 and then filling out Form 982 to report the one(s) for which you qualify.

But there is no place on that form to indicate that you believe that 1099-C is wrong. So how do you dispute it?

In his book How to Eliminate Taxes on Debt Forgiveness, tax professional Daniel J. Pilla describes the how do handle incorrect 1099-Cs. Here is an overview of the process he describes in detail in his book.

The first thing you must do if you receive one of these forms and you believe it’s wrong is dispute it with the creditor that issued it. Otherwise, the IRS (which receives a copy of it as well) will assume the amount listed on the form is correct. Write to the company and be very specific about why you believe it is incorrect. Ask the company to either withdraw it or to issue a corrected version, and give them a specific, reasonable deadline for doing so. Send your letter by certified mail with proof of delivery, and keep a copy for your records.

If the company does not respond, or does not cooperate, you will need to let the IRS know about your dispute. You do this by including IRS Form 8275, Disclosure Statement, with your tax return. On this little-known form, you will give the IRS a detailed explanation of why you believe the 1099-C you received is incorrect and why you do not believe you should have to include some or all of that income on your tax return. Explain that you tried to correct it with the issuer, and include a copy of that dispute along with proof of delivery so the IRS knows that you tried.

That may take care of it, or the IRS may question you about this issue. If that happens, make sure you respond to any questions or requests for information as quickly as possible.

He goes on to explain that if you can demonstrate a reasonable basis for your dispute, “the IRS will have the affirmative duty to produce evidence to support the accuracy of the Form 1099-C. That means the IRS will have to mine documents and information from the company in question and present a witness to support the claim.  Given the way banks, mortgage companies, credit card company and the like make and store their records, what do you suppose the chances are that the IRS will be able to produce such evidence?”

In his book, Pilla goes into more detail about circumstances where you can dispute these forms, and describes ways to legally avoid paying taxes on forgiven debt. For taxpayers who normally file their own taxes (with or without tax-preparation software), or hire a tax preparer who is not intimately familiar with these forms, this book does an excellent job of explaining this confusing topic.

When you dispute the Form 1099-C as outlined above, you can expect favorable results, says Pilla, but it might take a letter or two to get there. For example, while the IRS is likely to conclude the matter without further action, it is possible that its computer system will simply kick out a notice – Letter CP 2000 – since the Form 1099-C “income” is not reported on the tax return itself, Form 1040. If that happens, you have the right to appeal the determination.

By filing a simple protest letter, a sample of which is provided in Pilla’s book, your case is moved to the IRS appeals function where you have the opportunity to discuss your case with an appeals officer. This is a live person (you’re no longer dealing with computers and notices) to whom you will present your evidence and arguments. Assuming you’ve followed the above procedures, and further assuming the IRS is unable to locate any hard evidence to support the idea that you had debt forgiveness income in the year the 1099-C was issued, you will win your case.

In the meantime, the IRS is not permitted to begin collection action while your case is on appeal. As such, you don’t have to worry about wage or bank levies while you’re arguing about whether you owe the money in the first place. It is the threat of collection that keeps most people from challenging the IRS. But that risk is taken out of the equation when you file a timely appeal.

For more advice on how to handle 1099-C forms, read What is a 1099-C? Your Top 11 Questions Answered.

More Money-Saving Reads:

Image: iStock

Have you received one of these forms that is wrong? Share your story in the comments below.

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.

  • Gerri Detweiler

    You mean you received a 1099-c for tax year 2014 and you already filed your 2014 taxes? Or you just received a 1099-C for tax year 2013…? (Which would be very strange since those should have gone out last year.)

    Either way it sounds like you need to figure out if you’ll have to pay taxes on it. If you won’t, you may want to contact the IRS and ask them how to provide them with Form 982 for a return that’s already filed.

  • Gerri Detweiler

    Whether or not you can claim the exclusion depends on whether you qualify. Use the insolvency worksheet in IRS Publication 4681 to see. As for the first question – we have a story coming out on that tomorrow.

  • John Hunter

    I received a 1099 C stating I owed $3000 dollars to HFC II. HFC stated I opened a personal loan in the amount of $4000.00 in the year 2000. I have no documents to prove I paid off the loan except for it never appeared on my credit report and I had since taken out a mortgage with the same company in 2008. What can I do to dispute this 1099 C? Thank you

    • Gerri Detweiler

      John – I don’t have a simple solution for you but if you are convinced it is wrong (and sounds like that’s a distinct possibility) then follow the steps in the article. Dispute in writing with the lender via certified mail and if they don’t fix it then notify IRS. You may also want to file a complaint with the Consumer Financial Protection Bureau and the Taxpayer Advocate. I’d love to know how it turns out for you!

  • Gerri Detweiler

    We wrote about that here: Help! I Did My Taxes Wrong

  • Cherie

    i just received a letter from IRS saying we owe them $4415 from an adj of a 1099 from a company both my husband and I worked at till 2008 we have never received a bill or a 1099 from them. we have filed all previous 1099s my husband received from them and have not heard from them since we both left. what do I need to do? also the company has closed and filed bankruptcy

    • Gerri Detweiler

      While I’d like to help, I am only familiar with tax issues as they relate to 1099-Cs which are a different type of 1099 form. I’d suggest you talk with a tax professional or pose your question at the blog.

  • Gerri Detweiler

    Ah good to know! Hope it turns out OK for you.

  • Nathan

    My wife received a certified letter from the IRS two weeks ago stating she owes back taxes due to a 1099-c filed by AmeriCredit for 2012 taxes. This is the first we’ve heard of it, and she’s never had a loan or account with them, nor have they ever tried to contact her regarding collecting a debt. I’m not sure trying to file an exclusion is the way to go, as that would be admitting the debt was hers, even though it wasn’t. where do we go from here? We can’t afford to pay the increased taxes, or all the fees/costs that come with trying to fight it in tax court. I feel that AmeriCredit is falsifying their documents at our expense. Even if we win, we still have the added cost of missed work, court fees, travel and lodging… I’m prepared to send back the petition but would like to know if there’s a better way. The $60 they want just to contest AmeriCredit’s claims comes out of our dinner budget. Thank you in advance for any advice.

    • Gerri Detweiler

      I am confused. Who wants $60 to contest their claims?

    • Gerri Detweiler

      And I agree you should not file for an exclusion if it’s not her debt. Have you tried getting AmeriCredit to correct it? If you have the time, I’d suggest sending them a certified letter insisting on a corrected 1099-C (showing zero) and if they refuse going to the Consumer Financial Protection Bureau and the Taxpayer Advocate. You may need to do that at the same time you dispute it with the IRS using IRS Form 8275 as mentioned in the article. Please do let me know how this turns out!

  • Gerri Detweiler

    It definitely sounds like you qualify for the exclusion but to be sure you need to fill out the worksheet in IRS publication 4681. Remember, you’re filling it out based on the debts and assets that you had when that debt was canceled. That means you can include the amount of the debt before it was canceled as a liability. If you are still having trouble figuring it out, you may want to get the the ZipDebt Insolvency Calculator.

  • Gerri Detweiler

    Ah I see. There is a form you can fill out to request a waiver of the fee. It’s here:

  • Christina Morton-Toulouse

    My husband received a 1099-c from Wells Fargo at the end of 2014 for a $25,000 second mortgage that was forgiven from a foreclosure from over 7 years ago. Would this have to be included as income for tax liabilities?

    • Gerri Detweiler

      Yes, unless he qualifies for an exclusion or exception, or he can legitimately dispute it. If this was his primary residence then the easiest way to deal with this would be to claim the Mortgage Forgiveness Debt Relief Act exclusion if he qualifies. See this article:
      1099-C In the Mail? How to Avoid Taxes on Cancelled Debt

  • Gerri Detweiler

    You must address the 1099-C or the IRS will assume it is taxable income. Since you have what sounds like a legitimate underlying dispute about the validity of the debt you may need to get a Tax Opinion letter and/or file the explanation as described in this article to let the IRS know why you aren’t including it in your income.

  • Dan

    Was accepted for a HAFA? program with Bank A for a short sale on a New Jersey rental property. Bank A sold the $300,000 mortgage to Bank B before the short sale closed. Bank B finally approved the short sale, which closed 1/31/14 and Bank B received a net of $175,000 and forgave the balance of $125,000 for which I now received a 1099C. Since Bank B probably bought this debt for pennies on the dollar they probably made a profit on the short sale proceeds. Why would they issue a 1099C when they had no loss? Surely Bank A – who approved the HAFA and probably suffered the loss – should issue a 1099C? What should I do on my tax return?

    • Gerri Detweiler

      The IRS requires lenders to report canceled debt. They consider it “income” to you, even if it doesn’t feel like that. You may be able to reduce or avoid taxes on it if you qualify for an exclusion such as the insolvency exclusion, or because it is a business debt. Please consult with a tax professional who can walk you through your options. This is a large amount of money, and it can get complicated with rental properties. Make sure you work with a tax professional who really understands form 1099-C; not all do.

  • Gerri Detweiler

    It depends on the facts and circumstances, but often taxpayers do not have to pay taxes on a debt that is the result of a bona fide dispute. However, you may need to get a tax professional involved for an opinion letter. Attorney Hilton Wiener ( has written about this on his blog.

  • Gerri Detweiler

    The second part is easy. The worksheet says to list the Fair Market Value. That may or may not correspond with the taxable value depending on how real estate taxes are assessed in your area. The second part we attempted to answer in this article: Form 982: The Way to Battle a 1099-C. Beyond that, I’ll have to suggest you talk with a tax professional who really understands these forms.

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