A lender will submit Form 1099-C both to the IRS and to the person whose debt was canceled or forgiven. The document reports the amount of canceled debt. The amount of canceled debt is shown in box 2 of the form. For people who gave up their home in a short-sale, foreclosure, or other settlement process, the amount shown is for the loan principal that was left unpaid after the settlement. A description of the debt is shown in Box 5, such as the address of the property that the loan was for. Box 7 of the form will report the fair market value of the property. In a foreclosure situation, the gross bid price from the foreclosure sale will be shown as the fair market value.
Report any canceled debts that are not excluded on Form 1040 Line 21.
If you qualify to exclude some or all of the debt under the Mortgage Forgiveness Debt Relief Act, the insolvency exclusion, or the bankruptcy exclusion, then you will need to fill out Form 982 (pdf, 4 pages including instructions).
On Form 982, indicate which exclusion applies to you by checking the appropriate box on line 1. If more than more exclusion applies, then prepare a Form 982 for each exclusion. You'll also indicate the amount of debt being excluded from tax on line 2.
For the insolvency and bankruptcy exclusions, you will also need to make adjustments to other tax figures. For a detail explanation, see the section on the reduction of tax attributes in IRS Publication 908.
If you kept your house and restructured your mortgage for a lower mortgage balance, you will need to check the box for line 1e, report the amount on line 2, and report the same amount on line 10b. You also reduce your cost basis in the house by the same amount as on line 10b.