After searching online, there is 1 suggestion which keeps coming up, which I will just copy verbatim. Source
1) iTunes Edit menu->Preferences->Advanced, and put checkmarks in the boxes for "Keep iTunes Media folder organized" and "Copy files to iTunes Media folder when adding to library"; save prefs. (If you're using a Mac, it's the iTunes menu->Preferences->Advanced)
2) iTunes File menu->Library->Organize library; in the box that opens up, put a checkmark in the "Consolidate files" box. If there's a box labelled "Upgrade to iTunes Media organization" make sure it's unchecked. Click the OK button. This should force iTunes to update the file names and folder structure. It works fine for me -- I just tested it with a small library I created and set up to mimic your situation. (Consolidating is normally used to move files from one folder to another without losing iTunes' links to the filepaths. But in this case -- when the music files are already in the desired folder -- we're using Consolidation to force iTunes to rename the files that are already there.)
There are also many posts on the Apple forums complaining about this (with no answer in this case).