Is it the time of the year to start sending ‘pay me next year’ requests?

"Pay me next year" requests are common with employers, suppliers, vendors, customers and more. And this time of year, many people are asking for payment in January. They want to be paid, just not right now! If you (personally or your business) account for money on a cash basis like most people do, does such a request work?

You probably assume that you can't be taxed until you receive money. Yet if you have a legal right to payment but decide not to receive it, the IRS can tax you nonetheless. Is that fair? The IRS thinks so. Much of this kind of activity probably goes on in the real world.

Still, the IRS view is clear. The tax law includes the concept of constructive receipt. It requires you to pay tax when you merely have a right to payment even though you do not actually receive it. The classic example is a bonus check your employer tries to hand you at year-end.

You might insist that you would rather receive it in January, thinking you can postpone the taxes. Technically, that is wrong. Because you had the right to receive it in December, it is taxable then, even though you might not actually pick it up until January.

As a practical matter, if your company agrees to delay the payment (and actually pays it to you and reports it on its own taxes as paid in January) you would probably be successful in putting off the income until the next year. Yet even in this circumstance, the IRS might contend you had the right to receive it in the earlier year. The IRS does its best to ferret out constructive-receipt issues, and disputes about such items do occur.

The situation would be quite different if you negotiated for deferred payments before you provided the services. For example, suppose you are a consultant and contract to provide personal services in 2018 with the understanding that you will complete all of the services in 2018, but will not be paid until Feb. 1, 2019. Is there constructive receipt?

In that case, there shouldn't be. In general, you are allowed to do this kind of tax deferral planning as long as you negotiate for it up front and have not yet performed the work. Some of the biggest misconceptions about constructive receipt involve conditions. You are free to set conditions on financial transactions. Suppose you are selling your watch collection.

Say that a buyer offers you $100,000 and even holds out a check. Is this constructive receipt? No, unless you part with the watch collection. If you simply refuse the offer -- even if your refusal is purely tax-motivated because you don't want to sell the watch collection until January -- that will be effective for tax purposes.

Because you condition the transaction on a transfer of legal rights (your title to the watch collection and presumably your delivery of it), there is no constructive receipt. Let's apply the same reasoning to legal settlements. If you are settling a lawsuit, you might refuse to sign the settlement agreement unless it states that the defendant will pay you in installments.

Alternatively, you might specify that some or all of the settlement money must be paid to you during the first week in January, even though you are settling the case in December. Sure, it may sound as if you could have gotten the money sooner, and you probably could have. Even so, there is no constructive receipt because you conditioned your signature on receiving payment in the fashion you wanted.

That is different from having already performed services, being offered a paycheck and delaying taking it. But note that exactly how you fashion your settlement agreement is important. If you settle a case in December, sign the settlement agreement, and then say you want to be paid in January, watch out. You may have constructive receipt.

Of course, suppose that you really want the money now, so you sign and wait. What if the defendant simply fails to pay you until January? In such a case, there will almost certainly be a good basis to report the payment on your taxes next year, not the year you signed the settlement. Occasionally, the IRS or FTB will raise issues of this sort. But consistency is important, as is how the tax reporting forms are issued.

Tax issues crop up at the end of litigation in almost every case. After all, the plaintiff is receiving money, and the defendant is paying it. So one or both will have tax issues. Plus, if you are considering settlement offers, it can pay to consider the bottom line of those offers after taxes, not before.

In fact, when settling litigation, you should arguably always address taxes, preferably before you sign. Otherwise you may end up with tax issues you (or your client) do not expect. Sometimes, no matter how obvious you think the tax treatment may be, there can be problems. For example, a Form 1099 can spoil your day.

Suppose that you are the plaintiff in a 100 percent physical injury case that settles before trial. It may be clear that you are only receiving compensatory damages for your physical injuries. That sounds tax free. But what if you receive a Form 1099?

You have to report the payment to the IRS and the FTB, or they will send you notices. You can explain on your tax return that it should not be taxable. But it would have been nice not to have to do that. And to return to where we started, even simple "pay me later" requests might not be as simple as they seem.