What to Do if You Receive a Form 1099-C with Which You Disagree

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Guest bloggers and I have written before about issues created by “bad” Forms 1099. A post exists on Faulty Information Returns written by my former colleague at the Legal Services Center Caleb Smith; on Offset of a Tax Refund to Pay Student Loans written by my current colleague at the Legal Services Center Toby Merrill who heads the Project on Predatory Student Lending; on Proving a Negative and Cash for Keys by me. These posts generally deal with the situation of someone receiving a Form 1099 that may not be accurate and trying to deal with the consequences of the issuance of the form.


As Caleb discussed in the post about faulty information returns, this issue creates a significant burden in situations in which a class of individuals have their loans forgiven as a result of government enforcement litigation or private class action litigation attacking the debt provider or a debt buyer. In these situations, several hundred thousand people may have their debt forgiven as a result of litigation but the lender may feel compelled to issue a Form 1099-C to all of the members of the group or class obtaining relief. Frequently, the information return comes to low-income individuals not well equipped to cope with the tax consequences of receiving a Form 1099-C. The issuance of the Form 1099-C to hundreds of thousands of people who may have one or more defenses to the inclusion of the amount on the form as income also puts a strain on the IRS, which must cope with the resolution of the issue on an individual basis with each of the recipients rather than with the class.

In a couple of cases, the IRS issued guidance essentially telling the lender not to issue the Form 1099-C because the IRS could see that the issuance would create a train wreck for the individuals and the system; however, the IRS does not have an easy mechanism for issuing rulings that will stop the issuance of the Form 1099-C to a group or class of individuals. Several recent cases, including Corinthian, ITT, and Aequitas, involving student loan disputes highlight the circumstances that can lead to the issuance of massive numbers of Form 1099-C.

If the Form 1099-C goes out, then the IRS computers react like Pavlov’s dog. They scour the taxpayer’s account for a return reporting the amount on the information return. If the computers do not find the income from the information reported on a return filed by the taxpayer, the computers spit out an automated underreporter notice and the controversy is off to the races.

What to do on your tax return

One of the tough situations for low income taxpayers receiving a Form 1099-C is that the existence of this form places their returns “out of scope” for free income tax assistance at a Volunteer Income Tax Assistance (VITA) site. The tax clinic at Harvard refers qualifying individuals to VITA sites to have their returns prepared because the VITA volunteers generally do a great job and because they prepare the return for free. The combination of good quality and free makes these sites the perfect place to refer our clients; however, on this issue it does not help. Low income taxpayer clinics do not prepare current year returns because they focus on tax controversy, and return filing is not controversy. So, free assistance in preparing the return may be difficult or impossible to obtain. This is an issue, however, where paying money to get it right at the outset could save a lot of headaches (and money) in the future, so find a good professional to assist with the return if you can afford it and are not totally confident.

The guide discussed below helps people to understand how they can report the characterization of the amount on the Form 1099-C on their return. Because it’s hard to stop the issuance of Form 1099-C in most of the cases involving a class of individuals contesting the validity of a debt, and because no good way yet exists to warn individuals receiving the form who disagree with the amount on the form, the Legal Services Center created a brief guide for individuals who find themselves in this situation. The guide is not legal advice and is no substitute for professional advice on how to treat an item on a return, but might assist individuals struggling to come to a basic understanding of what the receipt of a Form 1099-C requires of them if they do not simply agree with the amount and characterization of the debt forgiveness. There can be more than one basis for excluding from income an amount reported on a Form 1099-C, which is why they are outside the scope of VITA volunteers’ services. So, using the guide should help a taxpayer start the process of reporting the information on a Form 1099-C but should not necessarily be the ending point. Having the return professionally prepared may save many downstream problems. The guide offers up two primary bases for taking the position that the debt is excluded – disputed debt and insolvency of the individual at the time of forgiveness. Others may exist and not all preparers may be equipped to make a proper evaluation. So, choose the preparer wisely.

What to do if the return gets audited

Even individuals who follow the guide to report information from a 1099-C may wind up in the correspondence audit process. The guide does not instruct individuals who wind up in the correspondence audit process on what to do, but for many individuals who file a return that the computer identifies as deficient in reporting the information on the Form 1099-C, understanding what to do in audit can also be important. Again, the information in this post is no substitute for professional advice, and low income taxpayer clinics can assist qualified individuals in the audit process to respond to the correspondence received from the IRS. The critical action in the correspondence audit is alerting the IRS to the dispute over the amount and characterization of the event on the Form 1099-C so that the individual can invoke IRC 6201(d) if the matter moves from the examination phase to the Tax Court.

If the individual who has received a Form 1099-C that they believe is mistaken as to the amount or characterization of the debt, and if that individual notifies the IRS during the examination, then it is possible to reverse the normal burden of producing evidence. That burden normally rests with the taxpayer because the taxpayer normally controls the evidence. Form 1099-C, however, is generated by a third party and not by the taxpayer. Therefore, Congress has provided in IRC 6201(d) that when the taxpayer has alerted the IRS to a problem with a Form 1099-C and has cooperated during the examination phase of the case, the burden of production concerning the accuracy of the Form 1099-C shifts to the IRS. So, responding to the notice of examination of the return can prove critical in an information return case.


It appears that large numbers of individuals are poised to receive Forms 1099-C. Addressing the form when filing the tax return could head off additional problems. If addressing the form on the return does not solve the problem, the taxpayer must respond to the notice of examination and alert the IRS to the dispute regarding the information on the form sent to the taxpayer.


  1. Mr. Burton Smoliar says

    There are two issues that I can’t fathom for 1099Cs. First–if accrued interest for a student loan is cancelled is the amount excluded limited by the $2,500 deduction limit? Also, the Regulations mandate issuance of 1099Cs where the statute of limitations on collection may not have run and the creditor may not have actually forgiven the debt. I have claimed exclusion in these situations, but I fear the clients haven’t kept track of when the statute of limitations actually ran.

  2. bryan camp says

    Very valuable post, Keith. Thank you. I think all clinic directors should be aware of this issue and your post is a great introduction to it.

    I would add only that I think the burden of production shift in 6201 is a more substantial shift than what is required by the Service to prevent an NOD from leading to a “naked assessment.” That is, when confronted with a taxpayer’s Form 1040 that conflicts with a third party’s Forms 1099, the NOD will not get a presumption of correctness unless the IRS has something—some “ligament of fact”—that connects the taxpayer to what is reported on the 1099. But 6201 is a procedural reward for taxpayers who cooperate in audit and it forces the Service to produce “reasonable and probative information…in addition to such information return.” I touch on that difference in this week’s Lesson From The Tax Court post over on TaxProf blog where I think Judge Lauber confused the “ligaments of fact” test with the 6201(d) shift. Here’s that link: http://taxprof.typepad.com/taxprof_blog/2018/07/lesson-from-the-tax-court-naked-assessments.html.

  3. Bob Kamman says

    The Stipulated Final Settlement and Order, in the case in which CFPB sued Aequitas, included this provision:

    “33. Defendants, or the Receiver on behalf of Defendants, shall use commercially reasonable efforts to obtain guidance from the Internal Revenue Service indicating that the Receiver is not required to make federal tax filings (including sending 1099 forms to Borrowers) as a result of the debt relief provided in this Order, prior to the time such forms would be required to be sent. If the Receiver, in consultation with his counsel, is satisfied that such guidance is reliable, the Receiver shall not make applicable federal tax filings and shall not send Borrowers 1099 forms.”

    Did this happen? You and I and six United States Senators want to know. In a letter to the CFPB Enforcement Director on May 7, 2018, that question was asked by Senators Murray, Brown, Nelson, Blumenthal, Gillibrand and Nelson.


    The letter points out that “The settlement further required that Aequitas submit a compliance report within 180 days of the order’s effective date that “describes in detail the manner and form in which Defendants … have complied with this Order.” Because this report is not publicly available, it has been difficult to determine if former Corinthian students have received the full relief they are entitled to, including tax relief from the loan cancelations. After all that Corinthian students have suffered over the last few years, incurring tax liability from their fraudulently-issued debt would only add insult to injury. To better understand the progress that has been made under the settlement, we would appreciate answers to the following questions and requests:
    1. Please provide a copy of the compliance report(s) submitted by Aequitas.
    2. What steps did Aequitas take to comply with the provisions of the order relating to obtaining guidance from the Internal Revenue Service?
    3. Please provide copies of any guidance sought or obtained from the IRS.
    4. Did borrowers who received loan cancelations receive Form 1099-Cs indicating that they have taxable income due as a result of the loan cancelation?
    5. Did borrowers who received cancelations receive any other tax form, document or guidance other than a Form 1099-C with regard to the loan cancelation?
    6. Please state the exact number of borrowers entitled to relief under the settlement order, the number of borrowers who have received loan cancelations, and the number of borrowers who have received Form 1099-Cs. . . .”

    It might be helpful if the National Taxpayer Advocate could follow up on what action IRS took if Aequitas complied with the court order and asked for guidance.

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