My balance of principal was $213,000 and the fair market value was $230,000.
Should I pay the IRS?

Probably not. Do nothing unless you receive a Form 1099-C.

These two factors may help you
1. If you lived in the house for two years and owned it for two years in last 5-years, you may be eligible to exclude gain of up to $250,000. Your U.S. Tax Return: Profit From the Sale of Your Home (http://taxipay.blogspot.com/2008/03/profit-from-sale-of-your-home.html)

2. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt of recourse loan on their principal residence. Your U.S. Tax Return: Foreclosure or Repossession of Main Home (http://taxipay.blogspot.com/2008/08/foreclosure-or-repossession-of-main.html)

You have effectively sold the house for $213K, and the bank received an asset worth $230K, so there is no issue here regarding income tax on any forgiveness of debt. In general, lenders will issue either a 1099-A if there was no debt forgiveness, or 1099-C if there is debt forgiveness, but not both, so you're clear on that. Whether you need to report the sale as a capital gain depends on (a) whether your $213K sell price is greater than your cost basis, and (b) if it is a gain, whether you qualify for an exemption as Mukata pointed out.