Gifts are not taxable for income tax purposes and should not be included on your return. TurboTax says: "If you received the money, no matter how much or how little, you don't report anything."
You could get a you-know-what" from the IRS because they won't know whether the 1099-K was a gift or something else. If you receive an audit letter, tell the IRS the amount was a gift and include some proof if possible. For example, maybe there was a personal message on the PayPal transaction. Otherwise you can ask the giver to write a note for you to send along with your response to the IRS.
Gifts up to $15,000 per person are not taxable for gift tax purposes to the giver so your friend will not have to worry about IRS issues if they write a letter for you.
For more info: Where do I report a cash gift?
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