US Tax Law: What happens when you don't know in what year income occured?

Factual Questions
1

Mods: Feel free to move this to IMHO if you feel it would be better there. I am not seeking specific tax or legal advice.

What happens if a person has incurred income that is taxable, but doesn’t know in what year it was incurred or needs to be reported?

Example:

Bill is a widget salesman. He, or his company, as applicable, is on a calendar year tax basis (tax year from January 1 to December 31) He meets Joe on December 31st and attempts to convince him that what he needs in his life is a widget. They talk for several hours into the night about widget quality, why buying a widget now is a good investment because the market has been abuzz with how widgets are going to become more expensive in the future, widget utility, why a widget is better than a doodad, why Bill’s widgets are of better quality than Sara’s widgets, and other appropriate topics.

Eventually, they reach a deal, and Joe hands over a fat stack of cash and Bill hands over a widget, or hands him a certificate redeemable for a widget at the warehouse, or something. Bill goes to record the sale in his ledger when he realizes that he doesn’t know what time it is, specifically whether or not Midnight has passed yet. His watch stopped sometime in the unknown past, he has no star charts, doesn’t know how to use them, or the sky is overcast, there is no reasonable way he can determine whether or not it is before or after midnight. He could walk or drive around, but he doesn’t have a stopwatch so by the time he reaches a working clock he won’t know how much time to subtract.

How would Joe (or Joe’s employer) report the associated income on US Federal income taxes?

A guess that I had was that, assuming that the widget sale is typical of Bill’s business, is that he would simply pick a year and report it, paying the taxes as calculated according to his WAG, and “de minimis non curat lex” and all that. Is that how it would have to work? Are there IRS procedures for this, or are there legal presumptions that he could use, such as a presumption that when the time of an event is unknown, it may be presumed, in the absence of other evidence, that it took place at (SELECT CorrectLegalPresumption FROM the earliest time it could have happened based on the available evidence, the midpoint, the latest time)? Could Bill call the IRS and get a binding adjudication as to when the sale took place?

What if the sale was really substantial and represented a material part of Bill’s income, and his income in the previous and succeeding years were so different that whether or not the sale took place in one year or the other results in a substantial difference in tax owed?

I did consider that if neither Bill nor Joe know what time the sale was made, the IRS would have little hope of proving that it didn’t happen in whatever year Bill ended up reporting it in, but I’m assuming that Bill wants to obey the letter of the law.

2

If Joe doesn’t know whether it was 11 pm on December 31st or 1 am on January 1st, how will the tax people know? They could check Bill’s records, if Bill was using the widget for business-related purposes, and so it was in the expenses that he claimed against business income. However, even then, if Bill was partying on January 1st, and only put the transaction in his books on January 2nd – or even waited until a week later, when the widget was delivered – is that really inconsistent with Joe putting it down as a December 31st transaction?

My guess, as a non-accountant, is that the tax people don’t really care, as long as you put it into one year or the other.

3

That’s what I figured, but I wanted to know if there are laws or IRS policies that specify what a person is, in theory, supposed to do.

Though, I could picture Bill being audited and asked for evidence that the sale took place in the year he reported it, but he has none.

4

For a cash-basis taxpayer (which is virtually all individuals and most small businesses), the important legal element is called constructive receipt. You are also required to maintain contemporaneous records.

So… Bill should create his own documentation of the date by writing up the sales receipt. In essence, whatever date he put there becomes fact unless there’s some kind of contradictory evidence. Failure to keep records has already put Bill on the wrong side of the law, so an auditor may have to use some judgment. They’ll often insist on relying on whatever records there are - such as a bank deposit on 1/2.

The transaction you describe doesn’t sound like one that’s reportable on a 1099-MISC form, but this is one way the IRS can make sure two taxpayers “synchronize” their reporting. If Joe issues a 1099-MISC based on a 12/31 date, the IRS will expect Bill to report the income in the same year. It could be that Joe and Bill disagree on the date - that’s always fun to resolve.

5

Have there been any cases (either IRS administrative cases or Tax Court proceedings) where this has been an issue regarding a more than De Minimis matter?

E.g. for the tax year 2009, Mary had a job that paid $150k a year. Toward the end of the year, she sold her house for a $50k capital gain, but she isn’t sure if the house closed on December 31 or January 1, because the real estate agent who handled the matter, signed the deed, constructively received payment for the house on behalf of Mary, and personally possessed all the paperwork, died in a plane crash on January 2 and the original paperwork was lost in the crash. In February, Mary loses her job and is unemployed for the rest of the year. Clearly, whether or not the $50k capital gain occurred in 2009 or 2010 could affect what tax brackets Mary ends up in for the two years. The deed had not yet been recorded at the courthouse because the courthouse was closed until January 5. Eventually, the check was certified as lost and was re-issued, and a substitute deed signed and transferred, but it stands to reason that Mary had already constructively received payment, and could have asked her agent to FedEx Ground the check to her rather than keeping it in his luggage on the flight. Has anything remotely resembling this ever happened?

6

To further this somewhat outlandish scenario and plug potential excuses to not answer the question:

The representative of the other side of the transaction (buyer’s agent) also died, or was rendered incapacitated and is unable to testify as to when the transaction was performed.

All Mary has is a text message received on January 1 at 5 AM that says “It is done. House closed a few hours ago. Have deed to record later when courthouse opens. and check. Will catch flight 555 home Jan 2 9 AM”

7

I’m a tax lawyer and I’ve never run across any authority here. Given (i) the scenarios needed for the question to arise, (ii) the fact that it usually won’t matter all that much which year it’s reported in, and (iii) the difficulty for the IRS in proving it was reported in the wrong year, I’d be surprised if the topic has ever been addressed in a case or public ruling.

To answer one question in the OP, Bill could obtain a private ruling from the IRS (at a cost of $10,000 plus lawyer’s fees and a wait of 3-6 months), and that ruling would protect Bill but not be binding authority for any other taxpayer.

8

My own personal experience. My first school year as a professor was 1975-6. Needless to say, my income for tax year 1976 was quite a bit higher than my income for tax year 1955. I did a consulting jobs in 1975 in the late fall of 1975 for which I received approximately $10,000. The check was dated 12/31/75 and mailed so naturally I didn’t receive it until 1976. As a cash basis taxpayer I reported and paid tax on that income for year 1976 (i.e., filed April 1977).

In 1978 I received an audit letter saying that I’d under-reported my 1975 income. I wrote back and explained my reasoning and was told I was wrong - the income was 1975 income. So I filed amended returns for both years and actually came out ahead because I moved the income into a lower income and hence lower tax bracket.

The story is actually a bit more complicated than that, but that’s the gist.