A story in the Wall Street Journal yesterday has been much talked about on the web, the man who turned down 12 round-trip coach tickets for two from the U.S. to anywhere in the world American flies. (He won the ‘We Know Why You Fly’ contest, I’ll save mocking American’s ad campaign for another post.)

The man turned down the prize because American reported that each ticket would be worth $2200, and so his tax liability was going to be $800 per ticket. The tickets expire within a year, and he quite reasonably didn’t think he’d get as much value out of them as he’d be liable for in tax.

As the Journal piece notes, it is possible to dispute the reported value of a prize.

Contest winners do have alternatives, according to tax experts. Those who don’t agree with the way a company has valued a prize can submit an alternative price with their tax returns, says Martin Nissenbaum, the national director of personal income tax planning for Ernst & Young LLP in New York. He once had a client who won a stereo on “Jeopardy!” that the show valued at $2,000. His client saw an advertisement with a much lower price and sent the Internal Revenue Service the ad with her return to support the lower valuation. It often helps to submit an expert opinion; one from a travel agent would help in Mr. McCall’s case, Mr. Nissenbaum said.



Mr. McCall says he was aware of the possibility of challenging American’s valuation of the vouchers on his tax return, but he thought that tactic was too risky. “The problem with that is that if the IRS didn’t buy it, I’d be” in trouble, he says. “And if I report something different than what American does, that’s a red flag for an audit. And who wants to be audited by the IRS?”



Nora Butler, an IRS spokeswoman, says an audit wouldn’t necessarily result from such a return. Still, she said the agency might need further clarification. “The best option for a person in this situation is to try to work it out ahead of time” with the company giving the prize away, she says.

The article doesn’t explain how this process works. Though not to be confused with tax advice, here’s my understanding of it from personal experience:

First, you should attempt to negotiate with whomever provides the prize. The official way to do it (since in most cases you won’t be successful just asking for an adjustment) is to call the IRS at (800) 829-1040. It’s best to do so early in the morning in my experience, since you’ll have a better chance of getting through.

Explain that you received the 1099 and disagree with the amount that was reported on it, and that you’ve tried to resolve the situation but have been unable to.

Tell them that you were advised to have the IRS complete a Form 4598, “Form W-2 or 1099 Not Received or Incorrect.” It’s not something you can just download from their website.

You’ll need to give the IRS the payer information from the 1099 you received and the details of how you arrived at your own valuation figures.

The IRS will send the complaint form to the payer, who has 10 days to respond (you should receive a copy as well). Hopefully the payer will simply send a corrected 1099.

If you don’t receive a satisfactory response by the due date of your return, you have two options.

One is to include the amount that you believe to be correct on your return and attach the Form 4598 and an explanation. The IRS may later send you a notice of the discrepancy, so keep your records in good shape.

The other option is just to enter an adjustment as a negative amount. (You can even do that without going through the process of seeking to adjust with 1099, but your case may be more strongly documented if you’ve taken that step.)

If you received a Form 1099-MISC that shows $1,000 in box 3 for a prize yon won in a contest, but you know that a local store has the same item available for $750, you argue that the fair market value is $750. You can enter the $250 difference as a negative adjustment under Other Miscellaneous Income. One of the popular tax software packages advises that you enter “PRIZE FMV ADJUSTMENT” for the description and “-250” for the amount.

No matter what course of action you pursue, you’ll want to document your adjustments, such as with ad clippings. If the prize was miles, and the fair market value was listed at a cost per mile greater than what the airline charges, simple printouts of the ‘purchase miles’ web pages should do the trick.