collections threats IRS form 3949A - help

Hello,
I am a newbie. Year 2010, I gave birth through C-section. We received plenty of bills from the hospital and made payment arrangements. We received a check from our insurance company on 2011 and deposited it in our account, thinking that we are already paying and we are really broke that time.
I begged Neonatal to lower the payment into somethimg which we could afford but they only told me $70 a month is the lowest they could give. Now, 1 $100 and 5 $70 payment, my company would close. As a resuly, i am only working 12-16 hours a week at $9/hour. We stopped paying them and enrolled in debt consolidation.
Yesterday, I received a letter that if I would not make payment arrangement or would not pay $688 within 30 days. They would file an IRS 3949a form because the insurance money is considered an income. We knew that and we're always honest in our taxes, declaring even $1.99 interest income.
I know that the form is when someone has a "knowledge" of fraud, while the neonatal doesn't have the "knowledge of fraud" because our tax isn't even filed yet and they did not have the "proof" that we will not or we did not include the insurance checks in our income declaration.
What shall we do?

Explain the matter to the debt consultants. They may have some knowledge on this. If they are unable to help you out, then contact a tax consultant and explain the matter to him/her. If you haven't committed any fraud, then there is nothing to be scared of.