1099-misc for income earned in 2006 and received in 2007?

Question

My wife has a sole proprietorship and did some work for a company that cut a check to her in December, but which was not received until January 2007. She is using cash accounting and considers this money recevied in 2007. However, the 1099-MISC indicates it was income paid in 2006.

I'm trying to do the taxes and her QuickBooks indicates this is not taxible for 2006 (since the money wasn't received until 2007). But the 1099-misc says otherwise. What should I do - either
(a) change her books to indicate it was received in 2006
(b) ask the company to reissue (or retract somehow) the 2006 1099-misc
(c) don't include the 1099-misc in the return and wait for the IRS to ask me about it, or
(d) something else I haven't thought of?

Thanks for your help.

Thank you all for the thoughtful answers. Pretty clearly, the concensus is to change the books (which we will be doing). As it happens, the company is not innocent in this matter, since they actually predated the check and sent it in 2007 for thier own budget/accounting purposes. But the amount is not significant enough to make a big deal about it.

Answer 1

I think you can do any of those things you mentioned. You didn't mention the amount of money involved. I think I would change Quickbooks to include it as income in 2006. That would be the easiest thing to do.

Asking the company to reissue the 1099 would mean extra work for them. They would have to send a notice to IRS indicating that a 1099 was issued in error (when it really wasn't) and send a new 1099 the following year.

If you decide not to include the income on your return, I would send an attachment to your return indicating that you are a cash basis taxpayer that received the 1099 in January for check issued in December.

In the future, look at the date on the check. That is probably the year the company will report their expense (and your income)

Answer 2

Because she was 1099'd in the year 2006, if you dont report it in 2006 it is going to show up as a huge red flag for the IRS. One of the main things they audit people for is not reporting W2 and 1099 income because it is so easy to spot.

It isnt reasonable to ask the company to issue another 1099, they won't do it. The best thing to do would be to adjust the entry to 12/31/2006 and pay the taxes on it this year. Either way you are going to be taxed for it.

Answer 3

(a) would be my choice. She had constructive receipt of the money in 2006.

It isn't realistic to ask the company to change their payment, they have already deducted this amount as an expense. The IRS will consider the 2006 1099MISC as 2006 income so you can't ignore it or wait for the IRS to correct the 2006 return if you leave it out.

Answer 4

The date on the check is what determines the year. To simplify the accounting, entering it into QuickBooks as December 31 would probably be a good idea.