Are you working with someone from H&R Block? You should most likely trust their assessment.
From what you stated in your post, the IRS believes there was a canceled debt and it was taxable as income and H&R Block does as well. This could also be dependent upon the state in which you reside (i.e., community property).
There is no Form 4681, only a publication that contains a worksheet and I presume you are referring to that.
