Having just done my taxes, and having dealt with a series of 1099s (alas, no prize income this year), I thought I’d resurrect this post from 2005 on how to dispute the value of a prize as reported to you on a 1099.
If you win a stereo, the provider of the prize says it’s worth $2000 but you can find it in a store for $750, what do you do?
Very important not to pay tax on that $2000 — you might wind up sending as much to the IRS as it would have cost to just buy the item in the first place!
Though not to be confused with tax advice, here’s my understanding of it from personal experience:
First, you should attempt to negotiate with whomever provides the prize. The official way to do it (since in most cases you won’t be successful just asking for an adjustment) is to call the IRS at (800) 829-1040. It’s best to do so early in the morning in my experience, since you’ll have a better chance of getting through.
Explain that you received the 1099 and disagree with the amount that was reported on it, and that you’ve tried to resolve the situation but have been unable to.
Tell them that you were advised to have the IRS complete a Form 4598, “Form W-2 or 1099 Not Received or Incorrect.” It’s not something you can just download from their website.
You’ll need to give the IRS the payer information from the 1099 you received and the details of how you arrived at your own valuation figures.
The IRS will send the complaint form to the payer, who has 10 days to respond (you should receive a copy as well). Hopefully the payer will simply send a corrected 1099.
If you don’t receive a satisfactory response by the due date of your return, you have two options.
One is to include the amount that you believe to be correct on your return and attach the Form 4598 and an explanation. The IRS may later send you a notice of the discrepancy, so keep your records in good shape.
The other option is just to enter an adjustment as a negative amount. (You can even do that without going through the process of seeking to adjust with 1099, but your case may be more strongly documented if you’ve taken that step.)
If you received a Form 1099-MISC that shows $1,000 in box 3 for a prize yon won in a contest, but you know that a local store has the same item available for $750, you argue that the fair market value is $750. You can enter the $250 difference as a negative adjustment under Other Miscellaneous Income. One of the popular tax software packages advises that you enter “PRIZE FMV ADJUSTMENT” for the description and “-250″ for the amount.
No matter what course of action you pursue, you’ll want to document your adjustments, such as with ad clippings. If the prize was miles, and the fair market value was listed at a cost per mile greater than what the airline charges, simple printouts of the ‘purchase miles’ web pages should do the trick.