1. You should report the income. The IRS will expect to see it because of the 1099-K. But you should also create an expense that says 'Account Suspension' or something like that and that expense should be the exact same amount as the payout that you didn't receive. That will zero out that income.
2. You can deduct the full cost of shipping as well as the goods themselves. Enter it just as if you had sold it for zero dollars. You should have a $9,200 loss for sending items out and not receiving payment.
3. That $9,200 is the only loss you get unless you had any other associated expenses. The only losses that you are entitled to deduct are the ones that take cash out of your pocket.
@JoeAdams
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