Don’t Wait Aaronson Law Firm Can Help You Dispute Your 1099 Form

Disputing a 1099 Through a Tax Attorney

You just received an erroneous 1099. It is not consistent with your records, and you must be pro-active in addressing it. First, contact the issuer, communicate the reason for the dispute, and be prepared to send copies of your records. If it’s a simple misunderstanding or oversight, the issue may be easily resolved with a substitute 1099.

Unfortunately, things are not always this simple. For example, in the case of a disputed contract, the creditor may claim a tax write-off for debt ‘forgiveness’. The IRS will, in turn, expect you to report this amount on your own tax return as income.

Particularly in these cases, your reason for non-payment may have to do with the existence of a legitimate contract dispute. You should clearly communicate this in writing, if you’ve not already, to the 1099 issuer. If this doesn’t resolve the issue, and the amount in question is significant, it is imperative that you hire a tax attorney.

You’ll have a limited amount of time within which to protect yourself, as your tax return will be due, typically within three to eight months, depending on whether you file for an extension. The disputed debt doctrine may apply here. A qualified tax attorney will file a specific form to dispute the validity of the issued 1099, invoking any and all claims and defenses which would apply in the context of any formal contractual dispute.
This may or may not resolve the issue. If the IRS accepts your position, the case can be resolved without procedures. If not, the situation may result in an audit, involving the possibility of a formal dispute in federal tax court. It is critically important that your tax attorney be admitted to practice before this tribunal in order to advance your position.

More often than not, a qualified tax attorney can avoid this prospect by engaging in the proper diligence on the front end of things. The penalties for tax evasion are very severe, and sometimes even give rise to criminal charges. In this context, one old adage is particularly appropriate: An ounce of prevention is worth a pound of cure. You owe it to yourself to hire a qualified professional.

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Tax Effects of Compromising A Disputed Debt

Section 108 and section 61(a)(12) of  the Internal Revenue Code set forth “the general rule that gross income includes income from the discharge of indebtedness.” I.R.C. § 108(e)(1). Even if the debt was a non-recourse obligation, if there exists collateral in association with its discharge, the amount of the non-recourse debt is taxable upon discharge, if liquidated, at face value. I.R.C. § 108(d)(1). In this instance, the basis or FMV or the property is of no consequence. See, e.g., IRS publication 468, Chapter 2.

However, where there exists a dispute concerning the validity of the debt ab initio, its taxability as imputed income upon discharge remains at issue. Further, if and when the obligation is settled through negotiation or accord the amount of the settlement is deemed to be the amount taxable if thereafter written off. N. Sobel, Inc. v. Commissioner, 40 B.T.A. 1263 (1939).

Generally, of course, a settlement will result in payment on compromised terms, whereupon there will be no imputation of taxable income. United States v. Hall, 307 F.2d 238 (10th Cir. 1962). In these instances, the amount originally claimed over and above the compromised amount is not taxable. Id. (See also, Zarin v. Commissioner, 916 F.2d 110 (3d Cir. 1990). So, for example, even where a debt is incurred unlawfully, such as an illegal gambling debt, its discharge, compromise, negotiation, or settlement may fix the amount actually owed. At that point, an accord and satisfaction thereof will negate any otherwise taxable event. Zarin, 916 F.2d at 116.

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