Unreported Income Disputes in Tax Court

The IRS says you earned $47,000 you don't recognize. Or that a credit card you forgot about ten years ago is now $8,000 of income. Or that the Venmo your roommate sent for rent is taxable. Or that your slot machine W-2G counts as income but your losses across other sessions don't. The CP2000 didn't fix it. Now you have a Notice of Deficiency and 90 days to file in Tax Court.

This is the substantive merits guide—not a procedural one. It covers the five kinds of unreported income that put pro se petitioners in front of the Tax Court: 1099 and W-2 mismatches, the gig-economy 1099-K problem, cryptocurrency, gambling, and cancellation of debt. And it explains the burden-of-proof rules that decide who has to prove what.

Several pieces of the landscape changed for tax year 2026. We will flag each one as it comes up.

What Counts as Unreported Income

Gross income under IRC § 61 is famously broad—"all income from whatever source derived"—and the Supreme Court extended that in Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) to "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." If you got something of value, the default rule is that it is income unless a specific provision excludes it.

For pro se petitioners, "unreported income" cases almost always fall into one of five buckets:

• 1099 and W-2 mismatches—a third-party information return reports an amount you did not include on your return, or did include but in a way the IRS computer did not match.
• 1099-K from payment apps and platforms—PayPal, Venmo, Cash App for Business, eBay, Etsy, Airbnb, Uber, DoorDash, Stripe, and similar settlement organizations report gross payments under IRC § 6050W.
• Cryptocurrency and digital assets—the IRS treats every disposition as a taxable event, and 2025-2026 brought new broker reporting on Form 1099-DA.
• Gambling winnings—W-2G forms from casinos, sportsbooks, and lotteries trigger automated matches even when you have offsetting losses or session-level netting.
• Cancellation of debt (1099-C)—a creditor's write-off can become taxable income unless an exclusion applies, most commonly insolvency.

Each one has its own rules, its own evidence problems, and its own defenses. The burden-of-proof framework cuts across all of them.

The Burden of Proof Framework

The single most important thing to understand in an unreported income case is who has to prove what. The default rule and the exceptions to it will shape every move you make.

The General Rule

Under Tax Court Rule 142(a) and Welch v. Helvering, 290 U.S. 111 (1933), the petitioner—you—bears the burden of proving the IRS's deficiency determination is wrong. The Commissioner's determination carries a "presumption of correctness." That is the starting position.

The Unreported-Income Exception (Weimerskirch / Portillo)

Several federal circuits hold that the presumption of correctness does not attach automatically when the deficiency rests on alleged unreported income. The IRS must first produce some "predicate evidence" or "minimal evidentiary foundation" linking you to the income-producing activity.

The leading cases are Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979) and Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991). Portillo held that a bare match of a Form 1099 against your Form 1040, with nothing more, is not a "determination" the Tax Court will defer to. The IRS must do more than match and assert.

The practical effect: if the only thing the Notice of Deficiency rests on is a disputed 1099 the IRS never investigated, Portillo gives you a serious argument that the presumption never attached at all. This rule is well-developed in the 5th and 9th Circuits and recognized in several others.

Section 6201(d)—The 1099 Burden Shift

IRC § 6201(d) is the most powerful provision a pro se petitioner has when fighting a 1099 or W-2 mismatch. It says: if a taxpayer (1) asserts a reasonable dispute with an item of income reported on a third-party information return, and (2) has fully cooperated with the IRS, then the IRS bears the burden of producing reasonable and probative information concerning the deficiency beyond the information return itself.

Two things have to be true to trigger it:

• Reasonable dispute. You have to articulate a basis—why the 1099 is wrong, why it does not apply to you, why the amount is overstated. A naked denial is not enough.
• Full cooperation. You have to have responded to IRS requests, produced what you could, and not stonewalled.

If you trigger § 6201(d), the IRS must come forward with the payer's records or other substantive evidence. It cannot rest on the 1099 alone.

Section 7491—Credible Evidence and Penalties

IRC § 7491(a) shifts the burden of proof to the IRS on any factual issue if you introduce credible evidence and meet recordkeeping and cooperation requirements. It is less commonly invoked in pro se cases but is worth raising in the petition.

IRC § 7491(c) is more reliably useful: it puts the burden of production on the IRS for any penalty asserted against an individual. The IRS must produce evidence supporting the penalty before you have to defend against it.

Penalty Approval Under Section 6751(b)

Most unreported-income Notices of Deficiency carry a 20% accuracy-related penalty under IRC § 6662 for substantial understatement or negligence. Before the IRS can assess that penalty, it must have obtained written supervisory approval at the right time under IRC § 6751(b). Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) and Graev v. Commissioner, 149 T.C. 485 (2017) made § 6751(b) approval a live issue the IRS has to prove. Always raise it in your petition; if the IRS cannot produce the approval, the penalty falls.

Reasonable Cause and Good Faith

IRC § 6664(c) provides a defense to § 6662 penalties: no accuracy-related penalty applies to any portion of the underpayment for which there was reasonable cause and the taxpayer acted in good faith. Treas. Reg. § 1.6664-4 describes the facts-and-circumstances test—reliance on professional advice, an honest misunderstanding of fact or law, isolated computational error, and effort to assess the proper tax liability all count. For pro se petitioners, reasonable cause is often a stronger defense than the merits, especially where records were lost, a 1099 arrived years after the fact, or the underlying tax position was reasonable. See our companion guide on how to request IRS penalty abatement.

1099 and W-2 Mismatches—From CP2000 to Notice of Deficiency

The IRS Automated Underreporter (AUR) program matches third-party information returns against your filed return. When it finds a mismatch, it generates a CP2000—a proposed assessment, not a final one. See our companion article on how to respond to a CP2000 notice for the procedural side.

When the CP2000 process does not resolve—you disagreed, the IRS rejected your explanation, or you missed the response deadline—the next step is often a Statutory Notice of Deficiency (the 90-day letter). From that point you are fighting the income inclusion on the merits, in Tax Court, before assessment.

Common 1099 Reconciliation Problems

The mismatches that keep landing in Tax Court tend to be the same handful:

• Duplicate 1099s. The payer issued the same income twice—once to your SSN and once to your single-member LLC's EIN. Under Reg. § 301.7701-2(a), a single-member LLC is a disregarded entity—the LLC and the owner are the same taxpayer—so the second 1099 is in fact duplicative. Show both information returns, show they report the same payment, and ask the IRS to confirm with the payer.
• Payer overstatement. A 1099-NEC reports a gross figure that includes reimbursed expenses, sales tax, or third-party processing fees that were never income to you.
• Wrong recipient. A 1099 issued to the wrong SSN—identity theft, transposed digits, or a name collision.
• Reported on a different line. You included the income on Schedule C gross receipts, but the matching engine looked at Schedule 1 line 8j.
• Wrong tax year. A check dated December 31 was not received until January; the payer reported it for the earlier year.
• Refunds and chargebacks. A 1099-K reports gross customer payments without subtracting refunds, returns, or chargebacks.

The Section 6201(d) Playbook

If your case is a 1099 dispute, build your record around § 6201(d) from the start:

1. Pull a Wage & Income Transcript to see exactly which information returns the IRS has under your SSN. See how to get and read your IRS transcripts.
2. Contact the payer in writing for a corrected 1099. A correctly issued corrected form ends the dispute. Save every email, letter, and response.
3. If the payer will not correct, document your reasonable dispute on the record. State the basis explicitly in your CP2000 response, your petition, and any answers to discovery. Cite § 6201(d) by name.
4. In Tax Court, request the payer's underlying substantiation. Through informal discovery (Branerton) and formal requests, ask the IRS to produce what the payer actually had—contracts, invoices, deposit records—not just the 1099. That is what § 6201(d) requires.

The IRS's own Internal Revenue Manual 4.19.3 obligates AUR examiners to consider taxpayer responses rather than rely solely on the information return. The IRM does not have the force of law, but it does bind agents, and Tax Court judges read it.

Gig Economy and Form 1099-K

Form 1099-K is filed by third-party settlement organizations (TPSOs)—payment apps, marketplaces, and ride-share platforms—to report the gross dollar amount of reportable payment transactions for a payee under IRC § 6050W. It has been the source of more pro se confusion than any other information return in the last few years, and the threshold has been moving.

The 1099-K Threshold Phase-In

The reporting threshold has changed almost every year. The IRS's current transition schedule under Notice 2024-85:

Notice 2024-85 sets the 2026 number at "more than $600," but the IRS has delayed this threshold multiple times and Congress has shown appetite to revisit it.

A 1099-K Is Not, By Itself, Income

A 1099-K reports gross payments processed through the platform. It does not characterize those payments. Whether they are income depends on what the underlying transactions actually were.

• Personal payments are not income. Gifts, reimbursements for a shared meal, splitting rent with a roommate, repaying a friend—none of these become taxable just because they ran through Venmo or PayPal.
• Sale of personal items at a loss is not income (and the loss is also not deductible under IRC § 165(c)).
• Sale of personal items at a gain is reportable as capital gain on Form 8949 and Schedule D.
• Business sales are reportable on Schedule C; you deduct refunds, returns, and chargebacks as separate line items.

How To Report a Non-Business 1099-K

The IRS has published a specific reporting mechanic for 1099-Ks that include non-taxable amounts. The current guidance on Understanding Your Form 1099-K:

• Report the full 1099-K amount on Schedule 1, line 8z ("Other income") with a description.
• Make an offsetting negative entry on Schedule 1, line 24z to back out the non-taxable portion.
• Keep records substantiating that the amounts were personal (bank statements, app screenshots showing payment descriptions like "rent" or "dinner").

If the 1099-K was issued in error—wrong account, miscategorized as goods-and-services when it was a personal transfer—contact the issuer first for a correction. If they will not correct, use the line 8z / line 24z mechanic with a description like "Form 1099-K received in error."

Mixed Personal-and-Business 1099-Ks

The most common real-world fact pattern is a single Venmo, PayPal, or Cash App account used for both personal transfers and a side hustle. The 1099-K is the gross total—no split between the two. You have to do the split yourself, transaction by transaction:

• Pull the transaction-level export from the platform (every app supports a CSV download for the year).
• Tag each transaction as business or personal, with a note on why (counterparty, description, surrounding context).
• Reconcile the totals. Business transactions go on Schedule C as gross receipts; personal transactions get the line 8z / 24z back-out treatment described above.
• Keep the working papers. In Tax Court, the IRS will press for the methodology behind your split. A spreadsheet that ties every transaction to one bucket or the other is what wins.

Bank statements showing the source and apparent purpose of incoming funds anchor the split. A note from a roommate or family member confirming a recurring transfer is a "share of rent" or "loan repayment" is contemporaneous evidence the Tax Court will weigh.

In Tax Court

By the time a 1099-K dispute reaches Tax Court, you need to be able to show the underlying nature of the payments. Useful evidence:

• Bank statements showing the source of incoming funds.
• Transaction-level records from the payment app showing descriptions and counterparties.
• Contemporaneous notes, calendars, or photos for personal-item sales (when bought, what paid).
• Witness statements from counterparties (friends, roommates) where appropriate.

Section 6201(d) applies the same as for any other 1099. If you reasonably dispute the characterization and you have cooperated, the IRS bears the burden of coming forward with reasonable and probative information beyond the form itself.

Cryptocurrency and Digital Assets

Since Notice 2014-21, the IRS treats virtual currency as property, not currency. Every disposition is a taxable event—sales for cash, swaps for other crypto, payments for goods or services, payments to contractors. Basis tracking is the taxpayer's responsibility, and that is where most crypto cases break down.

Common Taxable Events

• Sale for cash. Capital gain or loss on Form 8949 and Schedule D.
• Crypto-for-crypto swap (BTC for ETH). The IRS treats this as a taxable disposition of BTC at fair market value, with basis in the ETH equal to that FMV. Post-TCJA, § 1031 like-kind exchange treatment is limited to real property.
• Payment received in crypto. Ordinary income at FMV when received, then a separate capital gain or loss event when later disposed of.
• Mining as a trade or business. Ordinary income at FMV when received; self-employment tax may apply.
• Mining as a hobby. Ordinary income at FMV on Schedule 1, line 8z; no SE tax; no deduction beyond income.
• Staking rewards. Ordinary income at FMV when the taxpayer has dominion and control, per Rev. Rul. 2023-14.
• Hard fork without airdrop. Not gross income (Sit. 1 of Rev. Rul. 2019-24).
• Hard fork followed by airdrop. Ordinary income at FMV when you have dominion and control (Sit. 2 of Rev. Rul. 2019-24).

The Jarrett litigation (M.D. Tenn. Case No. 3:24-cv-01209, filed October 10, 2024) is currently challenging the staking-rewards rule, arguing that staking-created tokens are new property and should not be income until sold. The case is pending. Pro se petitioners should not rely on Jarrett as authority—report under Rev. Rul. 2023-14, and if you want to preserve the issue, raise it explicitly while recognizing the IRS will not concede.

Form 1099-DA—The New Broker Reporting

Beginning January 1, 2025, brokers—centralized exchanges, custodial trading platforms, payment processors that redeem digital assets, hosted-wallet providers, and digital asset kiosks—must report gross proceeds on Form 1099-DA. The basis reporting requirement phases in:

• 2025 transactions: gross proceeds only.
• 2026 transactions: basis reporting required for "covered securities"—digital assets acquired after December 31, 2025 in an account where the broker provided custodial services and held the asset until disposition.

The IRS has granted transition relief for early years—good-faith penalty relief for 2025 1099-DAs and backup-withholding relief for 2026 brokers, with TIN-matching-based relief for 2027.

A few practical points:

• Unhosted wallets do not produce 1099-DAs. Self-custody (Ledger, Trezor, MetaMask in non-custodial mode) involves no broker. You still owe tax on every disposition; you just have to track basis yourself.
• Decentralized finance (DeFi) broker rules were rolled back by Congress through the Congressional Review Act for 2025-2026.
• Basis defaults to FIFO unless you documented an alternative method consistent with Rev. Proc. 2024-28, which requires wallet-level basis allocation as of January 1, 2025.

Common Crypto Disputes That Reach Tax Court

The patterns repeat:

• The IRS reconstructs gross proceeds from exchange data; the taxpayer reported nothing or only part.
• Basis disputes—the IRS uses $0 basis when the taxpayer cannot substantiate.
• Pre-2018 crypto-to-crypto trades treated as taxable dispositions.
• Staking rewards (controlled by Rev. Rul. 2023-14 pending Jarrett).
• DeFi yield, liquidity pool tokens, wrapped tokens—complex transactions the taxpayer underreported because they did not know they were taxable events.

The Pro Se Crypto Playbook

1. Reconstruct basis from everything you can pull—exchange CSV exports, wallet transaction history, bank statements showing fiat in, blockchain explorers, third-party tools (CoinTracker, Koinly, CoinLedger) where they tie to the underlying records.
2. Default to FIFO unless you documented otherwise.
3. If the IRS reconstructed gross income from exchange data you dispute, raise § 6201(d) and request the exchange's primary documentation in discovery.
4. For basis disputes, anything contemporaneous is gold: dated screenshots of purchases, bank statements showing the exact fiat amount on the acquisition date, exchange statements.

When Your Exchange Went Bankrupt

For 2021-2022 disposals on FTX, Celsius, Voyager, BlockFi, and similar failed platforms, the evidence problem is sharper. The exchange's portal is gone, your historical CSV exports may be too, and the IRS's reconstruction often uses third-party indexers that show inflated gross proceeds without basis. Practical sources to rebuild a record:

• Claims-portal data. Kroll Restructuring and the various trustees publish case-specific portals where former customers can pull their claim balance and, in some cases, historical transaction data.
• Blockchain explorers (Etherscan, Solscan, Mempool) for on-chain trades that touched your known wallet addresses.
• Bank and card statements showing every fiat deposit to the exchange—these establish basis upper bounds even where the exchange records are gone.
• Third-party reconstruction tools (CoinTracker, Koinly, CoinLedger) that imported your exchange API while the exchange was operating.

Separately, lost or worthless crypto on a bankrupt exchange may qualify for a worthlessness loss under IRC § 165(g) or, in narrower circumstances, the Ponzi-loss safe harbor of Rev. Proc. 2009-20. The IRS's position on the worthlessness of customer claims in these cases is unsettled and pro se petitioners should be cautious; a tax controversy attorney is worth consulting.

Gambling Winnings

Gambling is the area where the rules changed most dramatically for tax year 2026. The same casino, the same machine, the same play pattern, taxed under the new law produces a different number.

W-2G Reporting Thresholds for 2026

Per the Instructions for Forms W-2G and 5754 (Rev. January 2026), thresholds for payments after December 31, 2025:

The Jan 2026 W-2G instructions establish a unified $2,000 minimum reporting threshold for 2026, indexed for inflation in later years. That replaces the long-standing $1,200 (bingo/slots) and $1,500 (keno) thresholds:

• Bingo and slot machines: $2,000 (raised from $1,200).
• Keno: $2,000 (raised from $1,500).
• Poker tournaments: legacy threshold more than $5,000 net of wager or buy-in.
• Sweepstakes, wagering pools, lotteries: legacy threshold more than $5,000.
• Other wagering transactions: legacy threshold more than $600 and at least 300x the wager.

How the new $2,000 floor interacts with the higher category-specific reporting thresholds is not fully resolved in current IRS guidance—the W-2G instructions direct readers to "the applicable reporting threshold." Watch for IRS clarification; in the meantime, treat $2,000 as the practical floor below which no W-2G should issue.

Regular gambling withholding (separate from reporting) remains 24% when winnings net of wager exceed $5,000 for sweepstakes, wagering pools, lotteries, parimutuel, and sports wagering. Backup withholding is 24% if a reporting threshold is met but no TIN is provided.

All Gambling Winnings Are Taxable

Regardless of whether a W-2G was issued, all gambling winnings are taxable income—lotteries, raffles, horse races, casinos, sports betting, the fair market value of non-cash prizes like cars and trips. IRS Topic No. 419 sets this out.

The Session Method

For slot machine play, gross income from wagering is computed on a per-session basis, not per-pull. Shollenberger v. Commissioner, T.C. Memo 2009-306 established the rule, with Notice 2015-21 proposing a parallel safe harbor.

A "session" runs from when you start playing to when you stop—you cash out, leave the machine, or leave the gaming area. Within a session, your combined wagers and combined payouts net to the gross income (the gain) or the wagering loss (the loss).

The catch: annual netting across separate sessions is not permitted. Each winning session adds to gross income. Each losing session is a wagering loss subject to IRC § 165(d). You cannot offset January's wins against July's losses on the income line. The losses go on Schedule A.

Section 165(d)—The Big 2026 Change

For tax years through 2025: wagering losses were deductible as itemized deductions on Schedule A, but only to the extent of wagering gains. They survived TCJA's elimination of misc. itemized deductions as a standalone "other itemized deduction."

The standard-deduction trap. Because wagering losses are an itemized deduction, a taxpayer who takes the standard deduction gets no offset at all—even when they actually lost on the year. If you have $5,000 in W-2G winnings and $7,000 in losses but take the standard deduction, you owe tax on the full $5,000. The only way to use § 165(d) losses is to itemize. This catches casual gamblers more than any other rule and is often the actual reason a recreational player ends up with a large Notice of Deficiency.

For tax years beginning after December 31, 2025—starting with 2026—the One Big Beautiful Bill Act (P.L. 119-21, § 70114) amended § 165(d) to cap the wagering-loss deduction at 90% of the lesser of (a) wagering losses or (b) wagering gains. The TCJA-era expansion that pulled non-wagering business expenses for professional gamblers into the § 165(d) cap was also made permanent.

The practical consequence: a professional gambler who breaks even on the year used to deduct losses to zero out the gross. Starting in 2026, only 90% of the losses are deductible. You can owe tax on a year you actually lost money.

Two bills propose to repeal the 90% cap (S. 2230 and H.R. 4304, the FAIR Bet Act). Neither has been enacted as of mid-2026.

Casual vs. Professional Gambler

• Casual gambler. Winnings on Schedule 1, line 8b. Losses on Schedule A as "other itemized deductions," subject to the § 165(d) cap (now 90% for 2026 and beyond). You cannot net wins against losses on Schedule 1.
• Professional gambler. Reports on Schedule C; subject to SE tax. Commissioner v. Groetzinger, 480 U.S. 23 (1987) is the test—gambling pursued full time, in good faith, regularly, with the primary purpose of livelihood. Post-TCJA, non-wagering business expenses (travel, lodging, meals) are also subject to the § 165(d) cap. OBBBA made that permanent.

Many states tax gambling winnings without allowing the federal loss deduction, producing large state-level tax bills on gross winnings even in losing years.

Sports Betting and DFS

Sports wagering is now an explicit W-2G category in the 2026 instructions. The same rules apply to DraftKings, FanDuel, PrizePicks, and other operators. The IRS treats daily fantasy sports as gambling.

In Tax Court

The IRS often asserts gross W-2G winnings without giving credit for session-method offsets within the same session. To win on the merits, you have to prove the session method with:

• Player's card statements from the casino.
• Casino win/loss statements (one piece of evidence, not the sole proof—they aggregate across cards, miss cash transactions, and casinos disclaim accuracy).
• A contemporaneous gambling diary with the elements Pub. 529 recommends: date and type of wager, name and address of the establishment, names of others present, amount won or lost.
• ATM withdrawal records from the casino.

Cancellation of Debt and the Insolvency Exception

When a creditor cancels, forgives, or discharges a debt for less than the full amount, IRC § 61 generally treats the canceled amount as gross income to you. Form 1099-C is the information return the creditor files when one of eight identifiable events occurs (Reg. § 1.6050P-1(b)(2)):

• Code A — Bankruptcy
• Code B — Other judicial debt relief
• Code C — Statute of limitations or expiration of deficiency period
• Code D — Foreclosure election
• Code E — Debt relief from probate
• Code F — By agreement
• Code G — Decision or policy to discontinue collection
• Code H — Other actual discharge before identifiable event

A 1099-C Does Not Automatically Create Income

The Tax Court has been clear: a creditor's issuance of Form 1099-C is an identifiable event, but it is not dispositive of the creditor's intent to cancel the debt. Owens v. Commissioner, T.C. Memo 2002-253 and Kleber v. Commissioner, T.C. Memo 2011-233 both held that the 1099-C alone is rebuttable.

A debt is actually discharged for COD purposes when it becomes clear it will never have to be paid (Cozzi v. Commissioner, 88 T.C. 435 (1987)). If you can show the creditor was still collecting, that the year of discharge was different, or that the form was issued in error, the 1099-C alone is not enough to put you in the income column.

Section 108 Exclusions

IRC § 108 provides several exclusions from COD income, in order of priority:

1. § 108(a)(1)(A) — Bankruptcy. Discharge in a Title 11 case. Report on Form 982, line 1a. Bankruptcy applies before insolvency—use it if you qualify.
2. § 108(a)(1)(B) — Insolvency. Excluded to the extent you were insolvent immediately before the cancellation. Report on Form 982, line 1b.
3. § 108(a)(1)(C) — Qualified farm indebtedness. Limited to active farmers.
4. § 108(a)(1)(D) — Qualified real property business indebtedness. Non-C-corporation election.
5. § 108(a)(1)(E) — Qualified principal residence indebtedness. Discharge of mortgage on the taxpayer's principal residence. Sunsets after December 31, 2025—the 2025 edition of Pub. 4681 states that QPRI cannot be excluded from income for discharges completed or discharge agreements entered into after that date, absent further legislation.
6. § 108(f) — Student loan discharge. Several categories: discharge for working in certain professions, discharge on death or total and permanent disability, and a broader ARPA-era rule that excluded most private and federal student loan cancellations between 2021 and 2025. After 2025 the broader rule sunsets and only the death/disability rule remains. A Social Security Number is now required to claim the exclusion for discharges after 2025.

Insolvency in Detail

You are "insolvent" under § 108(d)(3) to the extent your total liabilities exceed the fair market value of your total assets, both measured immediately before the cancellation. The insolvency worksheet appears at page 7 of Pub. 4681 (2025).

Liabilities include: credit card balances, mortgages and HELOCs, vehicle loans, medical bills owed, student loans, past-due mortgage interest and real estate taxes, prior-year federal and state income taxes, judgments, business debts of a sole proprietor or partner, margin debt, and other liabilities.

Assets include: cash and bank balances, real property at FMV, vehicles, household goods, tools, jewelry, clothing, books, stocks and bonds, collectibles, cash value of life insurance, security deposits, partnership interests, and other investments. Retirement accounts—IRA, 401(k), pensions—count as assets at full FMV, even though they are exempt from creditors under state law and ERISA. This catches many taxpayers off guard.

Insolvency amount = Total Liabilities − FMV of Total Assets (if positive; otherwise zero).

The exclusion equals the lesser of (a) the canceled debt amount or (b) the insolvency amount.

Two examples drawn from Pub. 4681 (2025):

• Example 1. You are released from $5,000 in credit card debt. Liabilities were $15,000 and asset FMV was $7,000. Insolvency = $8,000. Because $8,000 exceeds the $5,000 discharge, the entire $5,000 is excludable on Form 982, line 1b.
• Example 2. Same $5,000 discharge, but liabilities were $10,000 and assets $7,000. Insolvency = $3,000. Only $3,000 is excludable; the remaining $2,000 is COD income reportable on Schedule 1, line 8c.

Tax Attribute Reduction

Excluding COD income under § 108 is not free. § 108(b) requires you to reduce tax attributes in a set order—NOLs first, then general business credits, minimum tax credits, capital loss carryovers, basis in property, passive activity losses and credits, and foreign tax credits. Reductions are reported on Form 982, Part II. For pro se petitioners with no NOLs or carryovers, this is theoretical; for those with significant carryforwards, it is real.

Statute-Barred Debt

The IRS's position is that expiration of a state statute of limitations on debt collection does not extinguish the underlying debt—it only provides an affirmative defense to a collection lawsuit. So an old debt that becomes uncollectible by limitation is not yet "discharged" for COD purposes, in the IRS's view.

The Tax Court has ruled against the IRS in cases where a creditor issued a 1099-C but had not actually canceled the debt. The 36-month non-payment testing period that used to be an automatic identifiable event was removed effective for 1099-Cs filed after 2016.

For pro se petitioners facing a 1099-C on an old debt, defenses to consider in order:

• The debt was not actually canceled. The 1099-C is rebuttable (Owens; Kleber).
• The cancellation occurred in a different (often earlier) year. Discharge for COD purposes happens when it becomes clear the debt will never be paid (Cozzi, 88 T.C. at 445). If the actual discharge was years before the 1099-C arrived, the income belonged to that earlier year. If that earlier year is now closed by the assessment statute under IRC § 6501, the IRS may be barred from assessing on it. Newman v. Commissioner, T.C. Memo. 2016-125, accepted taxpayer testimony of insolvency for an earlier year without detailed records—useful precedent when documentation from a decade-old discharge is gone.
• The insolvency exception applies. Run the worksheet for the date immediately before the discharge.
• The bankruptcy exception applies. If discharged in a Title 11 case, use § 108(a)(1)(A) first.

In Tax Court

Substantiate insolvency with a financial snapshot as of the date immediately before discharge: bank statements, mortgage statements, all credit card statements, vehicle loan statements, retirement account statements, brokerage statements, car valuation (Kelley Blue Book or NADA), home valuation (recent appraisals, comparable sales, insurance valuation). File Form 982 with the calculation as backup whether or not a 1099-C was issued.

If the year of discharge is genuinely disputed—the 1099-C arrived years after the last collection activity—build the case for which year it actually occurred. That can shift the dispute out of the audited year entirely.

Building Your Pretrial Record

The work of an unreported-income case happens between filing and trial. Pro se petitioners who lose tend to lose here, not at trial.

Discovery and the Branerton Conference

Tax Court prefers informal discovery before formal motions. The Branerton conference (Branerton Corp. v. Commissioner, 61 T.C. 691 (1974)) is the standard first step—a meeting or call with IRS Counsel to exchange evidence and identify what is actually in dispute. Use it to ask for the IRS's underlying evidence: the payer's records, the exchange's data, the casino's player file. If Counsel will not produce informally, formal interrogatories and document requests are available.

Rule 91 Stipulations

Under Tax Court Rule 91, the parties are required to stipulate to all facts and documents not genuinely in dispute. Pro se petitioners often hand the IRS more than they need to here—agreeing to characterize a payment as "compensation" when the character is the whole dispute, or stipulating to the genuineness of a 1099 they actually contest. Read every proposed stipulation carefully. See our companion article on Stipulation of Facts—Tax Court Rule 91.

Pretrial Memorandum

Your pretrial memorandum is where you set out the burden-of-proof framework explicitly. Cite Tax Court Rule 142(a), Welch, and the Weimerskirch/Portillo predicate-evidence exception. Lay out § 6201(d)—the reasonable dispute, your cooperation, the IRS's resulting burden of production. Raise § 7491(c) for the penalty. See how to write your Tax Court pretrial memorandum.

Settlement

Most Tax Court cases never go to trial. More than 99% of cases close before trial in recent years, with most (76%) closing by formal settlement. The IRS Office of Appeals or IRS Counsel often concedes where the petitioner has built a § 6201(d) record. Make a written settlement offer with specific numbers backed by documents. See how to settle your Tax Court case.

Audit Reconsideration as the Fallback

If you missed the 90 days deadline and the deficiency has been assessed, Tax Court is closed but audit reconsideration is open. It is an administrative process where you ask Examination to reopen based on new information. It is slower and weaker than Tax Court, but for many pro se taxpayers it is the only door left.

Recordkeeping and Reconstruction

IRC § 6001 requires you to keep records sufficient to establish gross income, deductions, and credits. For unreported-income disputes, the records that matter:

• 1099 disputes: the payer's contract or invoice, bank deposit records, communications with the payer.
• 1099-K personal payments: bank statements showing source, app screenshots showing payment descriptions, contemporaneous calendars or photos for personal-item sales.
• Crypto: exchange CSVs, wallet transaction history, bank statements showing fiat purchases, screenshots, blockchain explorer data.
• Gambling: a dated diary with the Pub. 529 elements, player's card statements, casino ATM records.
• COD insolvency: a complete financial snapshot as of the date immediately before discharge—every account, every debt, every asset, with valuations.

When records are missing but the underlying facts are clear, the Cohan rule (Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930)) lets a court estimate the amount of an established item, "bearing heavily" against the taxpayer whose inexactitude is their own fault. Cohan does not apply to items requiring strict substantiation under § 274(d), but it can apply to gambling losses where the fact of loss is established.

When To Get Professional Help

Around 89% of petitioners represent themselves, but the win rate is lower than for represented petitioners (about 12% pro se vs. about 23% represented in the most recent NTA data). Some unreported-income cases call for help:

• The amount is large enough to justify it. If the deficiency is meaningful relative to your assets, even a few hours of professional time pays for itself.
• Possible criminal exposure. Large unreported cash income, repeated unreported years, or anything resembling willful evasion is not a pro se case. Get a tax controversy attorney.
• Complex crypto basis you cannot reconstruct. A specialist with the tooling will find more than you can.
• The IRS prepared a substitute-for-return under § 6020(b). Procedural and substantive issues compound.
• You are in the 5th or 9th Circuit and the case is framed around the predicate-evidence rule. The doctrine is well-developed there.

If your income is at or below 250% of the poverty line and your dispute is at or below $50,000, you may qualify for free representation through a Low Income Taxpayer Clinic. LITCs handle Tax Court cases and many specialize in this kind of dispute. See also when to get professional help with your tax dispute.

What To Do Now

If you have a Notice of Deficiency for unreported income and the 90 days clock is running:

1. Identify the deadline date on the face of the notice. It cannot be extended.
2. Pull your Wage & Income Transcript from IRS.gov to see what information returns the IRS has under your SSN.
3. Decide whether to file in Tax Court. A timely petition preserves your prepayment forum; filing is $60 with a waiver available. If your dispute is at or below $50,000 per year, you can elect small-case procedures. See how to file your Tax Court petition.
4. Do not file an amended return after a Notice of Deficiency issues. An amended return is not a substitute for a Tax Court petition. It does not stop the 90-day clock and does not moot the deficiency. The forum for changing the deficiency is the Tax Court petition.
5. Contact each payer in writing for any disputed 1099 and ask for a corrected form. Document the requests.
6. Build the § 6201(d) record from the first response forward—articulate the reasonable dispute, show your cooperation.
7. Run the insolvency worksheet if any 1099-C is involved, using values from the date immediately before the discharge.
8. Consider an LITC if you meet the income limits—they handle these cases free.

Resources

Statute:

• IRC § 61 — Gross income defined
• IRC § 108 — Income from discharge of indebtedness
• IRC § 165(d) — Wagering losses
• IRC § 6050W — Payment card and third-party network transactions
• IRC § 6201(d) — Reasonable verification of information returns
• IRC § 7491 — Burden of proof
• Tax Court Rule 142 — Burden of Proof

IRS guidance:

• Notice 2014-21 — Virtual currency as property
• Rev. Rul. 2019-24 — Hard forks and airdrops
• Rev. Rul. 2023-14 — Staking rewards
• Notice 2024-85 — 1099-K threshold transition
• Rev. Proc. 2024-28 — Digital asset wallet-level basis
• Instructions for Forms W-2G and 5754 (Rev. January 2026)
• Internal Revenue Manual 4.19.3 — Automated Underreporter

IRS forms and publications:

• Form 982 — Reduction of Tax Attributes (insolvency, bankruptcy, QPRI)
• Form 8949 — Sales and Dispositions of Capital Assets
• Form 1099-DA — Digital Asset Proceeds From Broker Transactions
• Form W-2G — Certain Gambling Winnings
• Pub. 525 — Taxable and Nontaxable Income
• Pub. 529 — Miscellaneous Deductions
• Pub. 4681 — Canceled Debts, Foreclosures, Repossessions, and Abandonments
• IRS Gig Economy Tax Center
• Understanding Your Form 1099-K
• IRS Topic No. 419 — Gambling Income and Losses

Companion articles on TaxCourtHelp:

• How To Respond to a CP2000 Notice
• You Just Got a 90-Day Letter From the IRS — Here's What It Means
• How To File Your Tax Court Petition
• How To Get and Read Your IRS Transcripts
• Stipulation of Facts — Tax Court Rule 91
• How To Write Your Tax Court Pretrial Memorandum
• How To Settle Your Tax Court Case
• How To Request Audit Reconsideration
• How To Find and Use a Low Income Taxpayer Clinic
• When To Get Professional Help With Your Tax Dispute
• How To Prove Your EITC and Dependent Claims to the IRS

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.