The IRS is seeking payment from my wife for back tax's from 2007.

In early 2008 one of my wife's friendships went bad. Apparently her ex-friend who also had a registered corporation in VA filed a 1099-MISC on my wife (approximatley $6,000) for the 2007 tax year, but my wife was never employed by the company nor did my wife ever receive any compensation of any sort from the company and of course we never received a copy of the 1099 from the company.

About 90 days ago we received a letter from the IRS asking us to either pay the back tax's or explain why we should not. We replied by letter that my wife had never been employed by the company, that she had never received any sort of compensation of any kind from the company, that she had never received her copy of a 1099 from them, and that the company was not registered with the state when they filed the taxes with the Fed Govt.

Late last week we received the IRS response to our letter which essentially said "pay the taxes or we'll continue to assess interest charges on the balance until you make full payment".

Asking my wife's ex-friend to correct or rescind the 1099-MISC probably wouldn't help so at this point I think I have three options: 1 - Cut my losees and pay the tax's. 2 - Continue to contest this with the IRS, but to do so I think I need to prove my wife didn't receive the money, the problem is how can I prove a negative? Is there some way to shift the burden of proof to the company that filed the 1099 or to the IRS? If not, what can I do to convince the IRS that the 1099 is not correct? 3 - Pay the amount due in full and file a claim for refund, but I really don't like the idea of doing this as now the IRS has the money and I have to fight to get it back and, even worse, it seems like an admission that we really do owe the money.

Any other suggestions?