There are two ways to report this. I assume you have a 1099-MISC with the prize in box 3?
1. Report the 1099-MISC as-is. Then, go to other income and create an item of other income in the amount of negative $1000 (minus). Call it something like "prize FMV adjustment". This will tax you on the right amount and you should be able to e-file. But the IRS may send you a letter asking why you did that.
2. Report the 1099-MISC at the prize fair market value. Print your return and file by mail. Attach a copy of the 1099 and a letter explaining why you reduced the amount and how you determined the true FMV.
You are correct that you should only be taxed on the fair market value of a prize. If it has a "suggested retail price" that is higher and you can prove that even the seller never sells it for that price because it's always "on sale" you can report the lower FMV as taxable income, but save proof of how you determined the FMV for at least 3 years in case of audit.
