@tgomax
I "retired" as a SuperUser when TurboTax switched to the "CHAMPIONS!" program, (queue up Queen's "We Are the Champions"), but still get notifications when things happen over here, and sometimes I respond.
First, since you are on the accrual basis indicating on your income tax return $100K of revenue and $900K of deferred revenue is absolutely the correct accounting. You have no real exposure to the taxing authorities if you are correctly reporting your taxable income.
Second, even if the IRS would contact you you certainly would not be undergoing an "audit" in the correct sense of the word. A more correct word to use here would be "inquiry." Your situation of getting a dollar figure on a 1099 that well exceeds the correct amount of income to report in this situation has got to be fairly common and one would hope that a well-written explanation of the transaction, perhaps with appropriate supporting documentation, would put the issue to bed. (I use the word "hope" because the taxing authorities sometimes are extremely - maybe purposely? - obtuse so sometimes you have to do some back-and-forth with them.)
You'll need to make the judgement here whether the cost to you of responding to the inquiry times the probability of them actually making the inquiry is more or less than the $2.5K cost of reporting the entire $1M as revenue.
