Summary Definition: In U.S. income tax law, the concept that income is taxable, even if the taxpayer hasn't yet physically received it.
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.
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:
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:
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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