In McCormack v. IRS, T.C. Memo 2009-239, the Tax Court ruled that the IRS cannot rely on merely the fact that a Form 1099-C has been issued by a creditor, when the taxpayer has made a good faith dispute of the amount due and owing, and there is then a settlement reached between the parties to that dispute.
The IRS must do more than rely on the amounts set forth in the Form 1099-C. Under IRC Section 6201(d), 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 with the IRS, the burden is then on the IRS to produce reasonable and probative information concerning a deficiency, in addition to the amount identified on the information return.
In the case, the taxpayers asserted reasonable disputes as to the amounts reflected on Forms 1099-C, and the IRS failed to produce reasonable and probative information independent of the third party information returns.
While not at issue in the McCormack case, taxpayers need to know that there is a provision in the tax law providing taxpayers with the right to be protected against the fraudulent issuance of information returns. Under Internal Revenue Code Section 7434 of the Internal Revenue Code, civil damages can be assessed if any person "willfully files a fraudulent information return with respect to payments purported to be made to any other person." Damages recoverable are equal to the greater of $5,000 or the sum of any actual damages sustained by the taxpayer as the proximate result of the fraudulent information return, including any costs attributable to resolving the deficiencies asserted as a result of such filing, plus the costs of the action, and in the court's discretion, reasonable attorney's fees
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