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Tax Court: When debt is disputed, IRS needs more than a 1099 to assess debt forgiveness tax

October 22, 2009

When the credit card company settles your account for less than you owe, the tax law says you have "cancellation of indebtedness" income. The bank has to issue a 1099-C, and if you don't report the debt forgiveness income listed on the form, the IRS comes calling. If the taxpayer fights the IRS, they IRS usually wins.

Not always. The Tax Court yesterday ruled that the IRS couldn't rely on the 1099-Cs to assess tax on a Pennsylvania couple who disputed their credit card balance:

In this case, respondent may not rely on the Forms 1099-C submitted by CitiFinancial and Chase as evidence of the amount of debt that was definite and liquidated. Section 6201(d) provides that in any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return and has fully cooperated, the Commissioner shall have the burden of producing reasonable and probative information concerning the deficiency in addition to the information return. Petitioners have asserted reasonable disputes with respect to the amounts reported by CitiFinancial and Chase. Respondent has failed to produce reasonable and probative information independent of the third-party information returns.

The Moral? If you can show that you have a dispute with the credit card issuer over the balance, the IRS needs more than the bank's say-so to assess debt forgiveness tax.

Cite: McCormick, T.C. Memo. 2009-239