Many of my debt relief clients receive IRS Forms 1099-C from creditors that have forgiven debts that were owed. If you owed the debt, and it was cancelled or forgiven by the creditor in the correct year, you may want to use IRS Form 982 to see if you qualify for an exception, whereby the forgiven debt does not constitute income to you. As a general rule, if a debt that you owe is forgiven, the IRS sees that as the same as you having made that much money, and they assess tax on it.
So if you owe $10,000 to Chase Bank on a credit card, and you quit paying it and Chase Bank decides that it is no longer collectible, they can properly send a 1099-C to the IRS; in fact, they are required to do so. But for example, if you can demonstrate to the IRS that you were insolvent in the year that the debt was forgiven (your debts exceeded your assets), then you don't have to pay tax on the forgiven debt, at least to the extent that you were insolvent. Another one of the exceptions is if you file bankruptcy.
The situation that this article is addressing is when you REALLY NEVER OWED THE MONEY, it was the wrong taxpayer, perhaps the 1099 just has the wrong amount of debt forgiven, or a 1099-C was mailed to the IRS years later, when you are no longer insolvent (although you were in the year that they gave up on collecting the debt). If the 1099-C is incorrect, the IRS has a procedure to dispute it.
First of all, of course dispute it with the party that sent it to you, the payer.
If that fails, call the IRS at 1-800-829-1040 and ask the IRS representative to start a Form 1099 complaint. The IRS rep should then fill out a Form 4598, "Form W-2, 1098 or 1099 Not Received, Incorrect, or Lost" form. This form can be used if the payer (the party that sent you the incorrect 1099) does not give you the corrected Form 1099 in time to file your tax return. Attach the Form 4598 to the tax return, but be sure to have documentation to support the correct amounts, if any.
If you don't believe that you can handle this kind of dispute by yourself, hire a competent CPA or "enrolled agent" that is authorized to practice before the IRS to help you..