I assume that the orginal 1099 he filed was a 1099-MISC, which what is filed for amounts paid to independent contractors. What you needed for him to file was a corrected Form 1099-MISC, not a Form 1099-C. Unfortunately, the IRS won't just take your word that the corrected 1099-MISC (which is, by the way, what you need, not a Form 1099-C) you have is correct. It wants him to file the corrected Form 1099-MISC. If he won't do it, one option is to sue him for damages for failure to do, assuming that the statute of limitations for suing him has not expired.
Otherwise, you are stuck with having to prove to the IRS that you didn't make the money that the 1099-MISC says you did. If you no longer have records from 2001 to do that, there may not be much you can do to prove that.
The IRS doesn't do substitute returns for you unless you didn't file a return for that year. Instead, if you filed, the IRS would audit your return and make adjustments to it. Of course, the computer would have matched what you filed against the 1099s and found the missing $7,000 and prompted the start of an audit, usually an audit by mail. You'd have gotten a number of notices during that process and would have had the chance then to address the problem before the IRS assessed the extra tax. If you ignored the notices or didn't get them because you didn't keep your address current with the IRS, then you missed out on the best time to try to fix a problem like this.
Before the IRS begins enforced collection, it must send you to your last known address a notice of intent to levy that tells you that you have 30 day to pay or appeal the determination to levy. During that 30 day period you can file an appeal and, if you've not had the chance before to challenge the amount of the liability, you can raise that in your appeal. This is known as a "collection due process appeal." If that 30 days is gone, it's too late to do that now.
If you are having trouble finding someone in the IRS to discuss the case with and give you an answer, try contacting the Taxpayer Advocate's Office. They are there to help when you are having trouble resolving problems. They cannot, however, override the law or IRS technical determinations. They can, however, help you find your way through the system and help you to relieve hardships that administration of the tax law may be causing you.
The next avenue to get this fixed if the IRS won't adjust the account is to pay the entire amount the IRS claims is owed and then file a claim for refund. If the IRS denies the claim, you can then sue the U.S. government in either federal district court or the court of federal claims to try to get your refund. These courts, however, are not like small claims court. It is highly recommended that you have a tax lawyer handle a case in these courts. Otherwise, you may make a procedural mistake and lose out before even getting the merits of your case heard.
You might want to consider contacting a tax professional (tax lawyer, CPA, or enrolled agent) to assist you in resolving the problem that you have with the IRS. They are familiar with the IRS and how it works, and may have better success resolving this than you've had so far.