unfortunately, the IRS is not sympathetic to people in your position. for example, people that win a car are taxed based on the sticker price which is usually far higher than what a person would actually pay. if you report $3,500 you'll get a matching notice from the IRS and likely will not prevail because the reporting agency said the FMV was $4500. pub 525 says use FMV. so it's your decision as to what to do
