Constructive Receipt
Summary Definition: In U.S. income tax law, the concept that income is taxable, even if the taxpayer hasn't yet physically received it.
What is Constructive Receipt?
In U.S. income tax law, constructive receipt refers to the concept that income is taxable, even if the taxpayer hasn't yet physically received it. The taxpayer is considered to have "constructively received" it at issue, meaning they have control of or access to it.
The constructive receipt doctrine applies to all types of income, including wages, interest, dividends, rental income, and other forms of compensation.
The Internal Revenue Service (IRS) requires taxpayers to adhere to the constructive receipt doctrine to report their taxes accurately and avoid penalties.
Income is constructively received when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.
Key Takeaways
- Constructive receipt deems income taxable when a taxpayer is able to control or access it, even if she or he doesn’t physically possess it.
- The IRS requires taxpayers to adhere to the constructive receipt doctrine to report their taxes accurately.
- If income is underreported or unreported because of not following this doctrine, taxpayers could owe more taxes, penalties, and interest.
Constructive Receipt Examples
A common example is when an employer pays an employee with a check or cash, or sends a paycheck to their home. The IRS will consider this money as income regardless of whether the employee has physically received it yet. In this case, the employer must report it as taxable income and pay taxes accordingly.
Other examples of constructive receipt include:
- A contractor completes a job in December but isn't paid until January. If the contractor could have gotten the money in December but waited until January, that's constructive receipt of income.
- An employee receives a bonus in December but chooses not to deposit it until January of the following year. That income is still taxable in the previous year.
- A landlord receives a rent payment in December but doesn't deposit it until January of the following year. This is also considered constructive receipt of income, as the landlord had the right to deposit the check in December but chose not to.
How to Comply with the Constructive Receipt Doctrine
To follow the constructive receipt doctrine, you must ensure payments or income are reported when they’re issued — not when you physically receive or deposit them. Use the following tips to help guarantee you’re compliant with this doctrine:
- Gather all relevant documents: The first step is to gather all relevant documents related to any income received constructively, such as invoices, statements, and receipts.
- Review the information: Review said documents carefully to determine if there’s any evidence of constructive receipt. This includes looking for additional payments or goods provided before payment was received by either party.
- Document the receipt according to local laws: After finding any cases of constructive receipt, document and store them according to the laws of your jurisdiction. This will help if they’re needed later.
- Create a system for tracking payments: Make sure you have an accurate record of how money has been allocated and accounted for over time. This helps you stay on top of your obligations under the constructive receipt doctrine and avoid any potential penalties from the IRS due to non-compliance.
- Keep records up-to-date and accurate: Finally, guarantee your records are always up-to-date and accurate. It's also important to periodically review them throughout the year to catch any discrepancies or mistakes that might’ve occurred during tax reporting periods.
Penalties for Not Following Constructive Receipt
Failing to follow the constructive receipt doctrine can lead to serious consequences, like an audit from the IRS. If income is underreported or unreported because of not following this doctrine, taxpayers could owe more taxes, penalties, and interest. In some cases, criminal charges may even be pursued.
Those using a payroll service provider must ensure they’re adhering to all relevant laws and regulations regarding income reporting. To do so, they should pay attention to constructive receipt rules when processing payments and related documents.
If you're confused about how constructive receipt works or how it applies to taxes, talk to a certified public accountant (CPA) or other tax professional. They can give more detailed advice.
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