Can my builder, who signed a settlement agreement waiving any and all debts and paying us an agreed upon sum to repair defects for which he was fired, send us a 1099 for the settlement amount plus any debt he says was owed when he was fired? We settled for a mere $7500 and he sent us a 1099 for $9400. His accountant/girlfirend left a threatening/defamatory message and did not send us anything to submit with our taxes should we be required to pay taxes on this. We know they violated the terms of the settlement agreement, which also states the party who violates the terms will be responsible for attorney fees and all costs of the other party as required to deal with the agreement violation.

You can challenge the validity of the Form 1099 with the IRS, but it can be a long and drawn-out process.

I suspect that at least PART of the $9,400 will be upheld as valid income realized due to the debt being forgiven.