I think everyone's missing something important here. If you return money in the same tax year you received it, the company can adjust their books and not issue the 1099-NEC. BUT if you wait until next year to return it, they're still required to issue the 1099-NEC for this year's payment. I did bookkeeping for a small business and we had this exact situation. A contractor wanted to return payment for a project they couldn't complete. When they returned it in the same calendar year, we just reversed the transaction in our accounting system. No 1099 was issued because effectively no payment was made that year. Just make sure you get documentation from them showing the return of funds and confirmation they won't be issuing a 1099-NEC.

Just want to say that returning the $$ is probably more hassle than just dealing with the 1099-NEC. I freaked out the first time I got one too, but it's not that bad! Honestly TurboTax or whatever tax software you use walks you through it pretty easily. And the SE tax isn't as scary as it sounds - it's just 15.3% on top of your regular income tax. Plus you can deduct half of it! Don't overthink this. Keep the money, report the income, claim whatever legit expenses you had, and move on. Unless there's some other reason you need to return the money that you haven't mentioned?

Just to add one more thing that nobody mentioned - if you're going to file a tax return with zero income just to maintain your capital loss carryover, you can e-file for free through the IRS Free File program regardless of your income level in previous years. No need to pay for tax software just to document your carryover.

I actually went through this exact scenario with capital losses a few years back. Make ABSOLUTELY SURE you file - I skipped one year thinking it didn't matter with no income and it caused a huge headache. The IRS flagged my return when I tried to use those losses two years later.

Another option: check if your trade-in was handled as a "tax credit" transaction. When I traded in my SUV last year, the dealer applied the value toward the new vehicle purchase which meant I didn't owe additional property tax on the old vehicle for that year. Bring your purchase agreement from the dealer to the tax office. Some states have specific rules where the dealer's trade-in paperwork automatically transfers tax liability. Worth checking before you pay anything!

My county uses this weird formula for prorating vehicle property taxes when you sell/trade during the year. Check your tax bill - there might be a phone number specifically for "vehicle tax questions" which is usually less busy than the main tax office number. Biggest advice: KEEP ALL PAPERWORK from both transactions! When I had to get my motorcycle tax adjusted, they wanted to see both the original purchase docs and the trade-in receipt with dates clearly visible.

One recommendation based on my experience with a similar situation - when you submit your documentation for the duplicate income, create a VERY clear cover letter that explains exactly what happened. Use bold headings and maybe even highlight the key parts. I made the mistake of sending in a detailed explanation but it was all in paragraph form. The IRS agent later told me they get so many responses that they sometimes miss important details if they're buried in text. When I resubmitted with a clear "DUPLICATE INCOME REPORTING" heading and bullet points, it got resolved within weeks. Also, send everything certified mail with return receipt so you have proof they received it! That timestamp can be critical if they try to claim you missed a deadline.

I'm a retired IRS employee and want to add something important that others haven't mentioned. With a CP3219A notice, you need to know that the IRS is required to use a specific process to document your dispute resolution. Request that they document your case in the AUR (Automated Underreporter) system with a specific transaction code 599 with action code 3. This code indicates "taxpayer disagreement" and forces them to manually review your documentation rather than just processing it through automated systems. When you speak with an agent, use these exact terms and ask them to confirm they've entered this code. It creates a different workflow for your case that typically results in more thorough review.

I went through almost the exact same situation last year! My advice: request a "technical advice memorandum" from the bank's tax department specifically addressing why they classified the payment as interest rather than compensation. In my case, the payment wasn't actually "interest" in the true tax sense because no principal was held that I had allowed them to use. It was actually a penalty payment / compensation for their administrative delay, which can be classified differently. When I pressed this issue and demanded to speak with someone who actually understood tax law (not just customer service), they eventually reclassified it properly. It took escalating to a manager and being very persistent, but it saved me thousands in tax benefits.

Has anyone considered that the HAF payment itself might be tax exempt? In most states, HAF assistance isn't considered taxable income by the feds. So the real question might be whether the "interest" portion would fall under the same exemption as the main payment. Based on guidance from my state's HAF program, the funds themselves aren't taxable, but I'm not sure about any interest or supplemental payments. Might be worth looking into the specific HAF program rules for your state!