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When Compensation Reverses but the Tax Bill Doesn’t
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Subscribe26 FEB 2026 / ACCOUNTING & TAXES
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The mechanics of compensating for overpaid executive bonuses can become complicated if it collides with closed tax years. The only time when it's a straightforward process is if bonuses are repaid within the same calendar year they were issued. The Supreme Court has confirmed that there's no legal duty to file an amended return with the IRS when an issue is discovered later. Instead, taxpayers might use section 1341, which applies when the taxpayer included income in a prior year because it appeared they had an unrestricted right to it, and in a later year, it becomes clear they did not have that unrestricted right. Regulators and shareholders expect actual repayments, not quiet offsets in future bonuses.
Every CPA has seen it. The executive who cashed a six-figure bonus three years ago now has to write a check to return it. The partner who received a signing bonus, left early, and suddenly owes the firm money. The founder who took compensation before the...
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