Does the IRS tax merchandise prize winnings as if it is cash

Pursuant to the tax laws, prizes that you win are considered income, whether cash, merchandise or services (e.g. travel) and are taxable as such.  Any income from any source is taxable and the tax laws give “income” a very broad definition.  You should have received a Form 1099 from the sponsor of the contest showing miscellaneous income of $5,000.   It does not matter whether you received cash or credit for merchandise. The income from prizes such as this is not taxed the same way as your regular wages, so you should have a professional check what the IRS did for correctness.  I can help you set up an Installment Agreement to pay the tax and I also believe we can get the IRS to forgive and cancel the penalties they have charged you for non-payment, late payment and underpayment of the tax.  Of course, interest will also be added but the IRS will not forgive that.