What Do You Do if You Claimed Income in the Wrong Year?

If you’re self-employed or have other irregular income like investments, you might find yourself in a situation where you reported your income in the wrong tax year. Here’s what you can do.

This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.

How is it possible to report income in the wrong year?

It’s actually very easy to report income in the wrong year. This usually happens with transactions that happen right around the new year.

A common example is if you’re expecting to be paid in December, don’t get paid until January, but still put it on your tax return for the previous year. You also might get paid right at the end of December, not update your bookkeeping until January, and end up putting that income on next year’s tax return.

Tip: You may want to wait to file until the 1099 due date passes or you know you have all of your 1099s to reduce the chances of making this mistake.

When do you need to claim your income?

Most self-employed taxpayers use the cash basis of accounting. Under the cash method, you report income when you receive it.

If you get paid on December 31st, it goes on last year’s tax return. If you get paid on January 1st, it goes on the new year’s tax return.

If you use the accrual method of accounting, you report the income when you can bill your client. So when you report your income would depend on if you normally bill at the start of the month, the end of the month, or right when you do the work.

Most investments and situations that aren’t self-employment follow the cash basis rules.

What do you do if you reported income in the wrong year?

If you reported income in the wrong year, you’ll need to file an amended tax return showing the correct amount of income for each year.

Income Claimed Too Early

If you reported income too early, e.g., reported it as December 2021 instead of January 2022, here’s what you need to do:

  • Amend your 2021 tax return to remove that income. This will typically result in a refund.
  • Amend your 2022 tax return to add that income. This will typically result in more tax owed. If you amend after the original filing deadline, you may owe interest and penalties. However, you may avoid those charges if your refund from the previous year’s tax return covers what you owe on the next year’s tax return.

Income Claimed Too Late

If you reported income too early, e.g., reported it as of January 2022 instead of December 2021, here’s what you need to do:

  • Amend your 2021 tax return to add that income. This will typically result in more tax owed. If you amend after the original filing deadline, you may owe interest and penalties.
  • Amend your 2022 tax return to remove that income (or file with the correct amount of income if you didn’t file yet). This will typically result in a refund if you’re removing income. If you apply your refund to what you should have paid in the prior year, it may remove or reduce your interest and penalties.

Can you choose when to report your income?

You can’t choose when to report your income. You have to follow your accounting rules.

For example, you can’t tell a client to wait to pay you until January to wait until next year to pay taxes. You also can’t do things like not going to the post office so you don’t get your check until January.

There are other strategies you can use to move income into a different year such as delaying finishing work until January or sending an early invoice in December. Some clients will want to pay you before the end of the year, even if it’s earlier than normal, because it increases their deductions for the current year.

What happens if your 1099 has the wrong year?

You may find yourself in a situation where your 1099-NEC or 1099-K has income in the wrong year. This is usually due to bank transfer times. For example, your client might have sent a payment on December 31st but you didn’t get it until January 1st.

Your client is correct to report the payment as of December 31st. You would still need to report the income as received on January 1st.

In this situation, you would want to save your bank statement or other information showing when you received the payment. You can either attach an explanation to your tax return when you file or wait to see if the IRS asks you about not reporting that payment.

Does this affect my deductions?

Reporting income in the wrong year doesn’t necessarily change your business expenses. You would still report those expenses as normal under the cash or accrual method of accounting you normally use.

A change in your income may affect your eligibility for other deductions and credits that depend on your income. For example, increasing your income may push you over the limit for the Qualified Business Deduction. Decreasing your income in the other you could mean you’re now eligible for the QBI deduction when you weren’t.

What happens if I don’t change my tax return?

If you don’t change your tax return, the IRS may send you a CP2000 Notice, CP12 Notice, or other letter saying you underreported your income in one of the years. This would usually be because the 1099s they received showed more income than you reported on your tax return. You may also be selected for a random audit.

The IRS generally wants you to report your income in the correct year. They don’t really go by, “but it evens out.”

If you don’t change your tax return, you might have to pay interest and penalties from the original due date of your tax return up until the time the IRS discovered the problem, sent you a notice, and you paid that bill.

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