The thing that this client did NOT KNOW is:
THIS INCOME IS USUALLY NOT TAXABLE.
Our staff is going to amend his return, as "Cancellation of debt is NOT taxable when the taxpayer is INSOLVENT or whose liabilities exceed their assets when they receive the cancellation of debt." MOST PEOPLE WHO LOSE HOUSES OR HAVE TO DO SHORT SELLS ARE ON THE VERGE OF BANKRUPTCY USUALLY! In other words, this client had been paying this back tax NOT KNOWING that he really shouldn't owe this debt. WE WILL AMEND THE RETURN QUICKLY. These are our favorite cases, and we get the happiest clients from fixing these situations.
Pamela Raines, who is the Enrolled Agent who leads our tax preparation department, and who is an expert on these kind of returns, will be the likely preparer of this return for you.
*CONGRESS SMARTENED UP AND ELIMINATED THE TAXABILITY OF CANCELLATION OF DEBT ON RETURNS 2008 AND ONWARD...DUE TO THE FORECLOSURE CRISIS. Link here: http://www.govtrack.us/congress/bill.xpd?bill=h110-3648
IMPORTANT CAVEAT: IF YOU RECEIVED A 1099-A OR 1099-C FOR A DEFAULTED RENTAL PROPERTY OR REAL ESTATE INVESTMENT -- THE RULES MAY BE DIFFERENT AND THERE COULD BE SOME CONSEQUENCES.