Question: The company bookkeeper embezzled $150,000 over a three-year period from 2017-2019. The business is accrual basis and filed an insurance claim in 2019, the year the embezzlement was discovered. The insurance proceeds were received the following year in 2020. When should the insurance proceeds be reported in income: in 2020 when received, in 2019 when the discovery was made and amount determined, or does the company amend each of the prior three years and adjust them for their pro-rata share?
Answer: Because the business is accrual basis, they accrue the insurance income receivable in 2019. If they had been cash basis, they would have reported the insurance as income when it was received in 2020.
The idea with accrual basis taxpayers is that they report income when all events have occurred to earn it and when the income can be determined with reasonable accuracy. Using this idea, income is reported at the earliest of:
- When the payment is received
- When the income amount is due to the taxpayer
- When the taxpayer earns the income
- When title passes
Though these points are for normal business income, the taxpayer can still apply them to this scenario. In this case, items one and two would be the most appropriate. The income became due to the taxpayer when they submitted the insurance claim in 2019. Therefore, record the insurance receivable and the insurance income in 2019. Do not go back and amend 2017 and 2018 as the amount was not received or due to them in those years.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.