Fighting a Form 1099 with Which You Disagree

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We have written about cases involving Form 1099 previously on several occasions including one post early last year that provides approaches both the IRS and the taxpayer might take to the problems created by a Form 1099. I also wrote a post yesterday discussing how to approach a Form 1099-C contest. An order entered in the case of Horejs v. Commissioner, Dk. No. 4035-17 shows that, no surprise, the problem continues and that at least one petitioner was pretty upset about the trouble it took to fix the problem. A bad information return is costly to the IRS and to the taxpayer as Horejs demonstrates. Just as it is critical to the system to do everything possible to get tax returns correct at the outset it is critical to get information returns correct as well. The preparer of a bad information return, however, usually does not pay the price inflicted on the taxpayer and the IRS to unwind the bad information provided.

The Horejs case also raises an interesting jurisdictional issue regarding a refund to an intervenor.

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Citibank sent a Form 1099-C to Mr. Horejs, his wife Mary Baldwin and the IRS indicating that Mr. Horejs and Ms. Baldwin had income resulting from the cancellation of debt. Mr. Horejs told the IRS, presumably during the audit phase though the description of the timing is not perfectly clear, that the “Form 1099-C was incorrect, referring respondent (the IRS) to litigation between petitioner (Mr. Horejs) and Citibank.” The IRS asked for more information about the dispute which Mr. Horejs did not provide. Specifically, the IRS asked him to contact Citibank to obtain a corrected Form 1099-C and send it a copy.

While it would be nice if Citibank would oblige, in situations like this Citibank and the taxpayer usually have a broken relationship. The fact that Mr. Horejs sued Citibank about the debt suggests that he will probably struggle to convince Citibank to send him a new form. Mr. Horejs alleges in his case with the IRS that it was wrong for the IRS to ask him to do this and wrong for the IRS to rely on the Form 1099-C sent to it by Citibank. I sympathize with Mr. Horejs and I also sympathize with the IRS because it’s trying to resolve a problem it did not directly create. Because of the impasse regarding the Form 1099-C at the audit stage, the IRS issued a notice of deficiency. This is an easy way for the correspondence auditors to kick the problem upstairs.

Of course, sending the notice of deficiency not only prolongs the problems for the taxpayer and the IRS but also brings another innocent party into the situation, the Tax Court. The parties before the court and the court itself generally do not possess the information necessary to resolve the case and the system does not create a mechanism to make the issuer of the Form 1099 a party to the case over which the court would have power to issue orders and over which it could impose sanctions. Perhaps we should build a better mousetrap with respect to information return cases and make the issuer of the information return a party, get everyone in front of the court at the same time and assign “blame”, including the imposition of penalties against the issuer of a bad information return or against the taxpayer. If the information return issuer were a party to the litigation, the IRS would have almost no work to do because it would be up to the information return issuer to come forward with information to support the basis for issuing the information return and up to the taxpayer to respond when the information return issuer came forward with solid evidence to support the issuance.

But that’s not the system we have.

When the IRS sent the notice of deficiency, Mr. Horejs filed a Tax Court petition. Mary Baldwin did not. Since she did not file a petition, the IRS assessed the proposed deficiency against her. She paid the liability while Mr. Horejs’ Tax Court case was still pending. Then she filed Notice of Intervention and the Court issued an order amending the caption and allowing her to intervene. I do not recall seeing this before but maybe I just have not paid enough attention to parties trying to intervene.

Meanwhile, the IRS made contact with Citibank to request support for the information return it issued. Citibank responded by sending the IRS a corrected Form 1099-C reporting that petitioner had not received cancellation of indebtedness income in 2014. Based on this change of heart by the issuer of the information return, the IRS prepared a decision document conceding the deficiency in the case. The order indicates that Mr. Horejs and Mary Baldwin signed the decision document as did the IRS attorney; however, neither Mr. Horejs nor Ms. Baldwin were happy.

Mr. Horejs filed a motion for summary judgment asking for his $60 filing fee, $500 for time and expenses dealing with the matter, a refund of the money paid by Ms. Baldwin, a letter of apology from the IRS and damages from Citibank for issuing a false document. At the hearing on the motion, the Court explained it did not have jurisdiction to order the IRS to apologize or to order damages against Citibank. The IRS stated at the hearing that it would issue a refund to Ms. Baldwin at the conclusion of the case and the parties filed a stipulation showing her statement of account.

Steve wrote a two part post last fall on 7434 generally for anyone interested in the relief available there.

So, Mr. Horejs wins his case. Does not receive an apology, does not receive compensation for his time and effort or his outlay of funds for the filing fee, does not receive, at least in the Tax Court, a recovery of damages from Citibank and may feel pretty empty as a winner since winning in Tax Court is often not as much winning as avoiding losing. I am sure he is still unhappy and frustrated. Still, an interesting thing happens in this case in that Ms. Baldwin, who did not timely file a Tax Court petition and now comes into the case as an intervenor, gets all of her money back (plus interest). The result shows that intervenors can obtain a recovery of an overpayment in a Tax Court case and creates an interesting aspect of Tax Court jurisdiction of which I was previously unaware. Hat tip to Carl Smith for noticing this unusual wrinkle in a Tax Court case. Maybe more non-petitioning spouses will come into the Tax Court after being assessed and use this refund forum.

 

 

 

Comments

  1. Bob Kamman says:

    Here is another case where the taxpayer disputed a bank 1099-C (this time, Chase Bank, in January 2018) and won in Tax Court:

    https://www.ustaxcourt.gov/InternetOrders/DocumentViewer.aspx?IndexSearchableOrdersID=248618

    In another ongoing case, Judge Nega in February 2018 noticed something neither party had seen:

    “During the trial it came to the Court’s attention that at least some of petitioner’s cancellation of indebtedness was in relation to his primary residence and not the rental property in which petitioner had initially alleged. After a lengthy discussion with the parties on the record, the Court informed the parties that it may entertain a motion to reopen the record under certain circumstances. Specifically, petitioner should share with respondent any documents he may use to qualify under the principal residence exception pursuant to I.R.C. section 108(a)(1)(e).”

    https://www.ustaxcourt.gov/InternetOrders/DocumentViewer.aspx?IndexSearchableOrdersID=257229

    In today’s Horejs case, it appears that there was litigation between the petitioner and the bank, and the petitioner won. The left hand at Citibank (in charge of issuing 1099-C’s) did not know what the right hand (legal department) was doing. This is typical of large institutions, whether they are private enterprise (banks) or governmental (IRS).

    If there is a good-faith dispute about the validity of the debt and it is settled – for example, by stipulation, that the creditor is not entitled to anything, as in yesterday’s post involving the CFPB and a school that made private student loans – then the canceled debt is not income. See the Tax Court case of McCormick (T.C. Memo. 2009-239), which cites Zarin v. Commissioner, 916 F.2d 110, 115 (3d Cir.1990).

    IRS has a 16-page Publication 4681 that tells you everything you need to know about canceled debt and Form 1099-C, except in these situations where there is a settlement of a dispute. I will express some sympathy for IRS, when they get around to adding this important information to their own publication. It’s not that they ran out of space. There is room at the bottom of Page 16.

  2. Norman Diamond says:

    “At the hearing on the motion, the Court explained it did not have jurisdiction to order the IRS to apologize or to order damages against Citibank.”

    Did the court explain why it did not have jurisdiction to order a refund of reasonable litigation expenses to the prevailing party? Or did it explain that the IRS’s position had been justified — a 100% concession by the IRS is a 0% concession on the question of whether the conceded position was justified?

    Though since one party was already suing the issuer of the faulty information return, surely the expenses could be added to that lawsuit.

    Meanwhile, does anyone know how to fight a Form 1099 which the payer timely issued and taxpayer timely AGREED with, but the IRS refuses to file it and a District Court even denied the taxpayer’s motion to compel the IRS to contact the payer?

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