But I din't get the money then!

Often people in business experience receipt of income in early January but soon thereafter receive a 1099-MISC indicating that the money was paid to them in the prior year. This is an important issue for cash-based taxpayers. What to do?

The issue is called "constructive receipt" and it does not qualify as simple.

The law states that constructive receipt occurs when you have access to or control of the money. If you receive a check in the mail, it is easy to see that you now have constructive receipt. Once the money is in your bank account, you clearly have constructive receipt on or before that point in time. This income must be claimed in the year that you have constructive receipt.

But what about that check you received January 2? Maybe it was mailed to you on December 31, so the payer will claim the expense for last year and issue you a 1099-MISC indicating that you were paid last year. But were you? If that check was mailed from across the country, then your constructive receipt will be when you received it. But if you could have stopped by the payer's office on December 31 and picked up the check, then you had constructive receipt last year regardless of when you actually received the check.

If your money is being held by a bank, then it is a bit more complicated. The facts and circumstances of your particular situation will dictate when constructive receipt occurred.

What do you need to do if your constructive receipt is in January but the 1099-MISC indicates that you received the payment in the prior year? First you will need documentation showing when you received the check in the mail. Be sure to keep the envelope showing the postmark as a minimum. You will also need documentation indicating how available the check was before January 1. Second there are some things that a tax practitioner can do to file your tax return postponing that income yet avoid an examination letter from the IRS. (That will be triggered automatically when the 1099-MISC information is not included on your tax return.) This is worthy of a conversation with your tax practitioner, so make that phone call!

Finally, have a merry Christmas!