I recently settled on a home modification in 8 / 2012 . A 1099 - c for the amount of approx ~ $ 43K was issued . When plugged in to my tax returns for 2012 , I will be held responsible for about ~ $ 12 in tax liability . The cancellation of debt was issued for a combined 1st mortgage modification & a 2nd mortgage pay - off for lesser amount . I have initiated a dispute of the amount , because they don't correlate with my calculations . I do expect a poor outcome , and will succumb to this huge IRS bill . I may attempt to fill out form 982 & claim insolvency . But my main questions is : in the current year of 2013 , I will be incurring a short sale & suspect that BOA will submit a 10-k of approx ~ $ 10-k , which constitutes a tax liability of $ 60S . How do I prepare for that hit or avoid paying ?