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hnfoster
New Member

What happens if you report a difference of prize winnings and the fair market value

The 1099 misc form shows $4500, but the prize is actually worth $3500.00.  What do I need for the IRS?
3 Replies
Opus 17
Level 15

What happens if you report a difference of prize winnings and the fair market value

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. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Anonymous
Not applicable

What happens if you report a difference of prize winnings and the fair market value

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  

Opus 17
Level 15

What happens if you report a difference of prize winnings and the fair market value


@Anonymous wrote:

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  


I disagree.  If you can legitimately document the value, you should win your case.  I suppose a nasty auditor could force you to appeal to tax court, but you can represent yourself if you do proper preparation.

 

I read a tax court case once where the plaintiff won a necklace at Macy's valued at $5000 but a jeweler would only appraise it for $1200.  The auditor denied, plaintiff went to tax court, and was able to prove that $5000 was the "comparable value" price and that over the course of a year, Macy's selling price was never higher than $1499, it was always "on sale."  The tax court allowed him to value it at $1499 and pay tax on that basis. 

 

You have to be thorough and you have to have proof.  It's not just enough that you think it's worth less, or that it is usually on sale.  If at least some people pay full list price (which is probably true with cars, for example, because there are always a few people who hate to haggle or get taken by clever salespeople) then you probably won't win your case. 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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