The above answer is not correct. You are only required to report income that you received during 2020, even if you had not completed the work. However, income that you did not receive until 2021 is 2021 income.
Be aware that the IRS follows what is called the “doctrine of constructive receipt“. Constructive receipt means that you received the money when it was available for you to spend, even if you did not actually spend it. For example, if the client wrote a check that was dated December 31 and placed it in your hand on December 31, then it is 2020 income, even if you did not deposit the check until 2021. However, if the check was dated December 31 and they put it in the mail, and you did not receive it until January, 2021, then it is 2021 income. If the client uses an online payment system and you were authorized to draw payment in 2020, then it is 2020 income even if you did not draw it until 2021.
It is true, however, that if you do not report an amount that matches the 1099, the IRS may send a letter of inquiry. It sounds like you have a perfectly reasonable explanation, assuming that you can prove it with bank records or check stubs, and assuming that you are prepared to report the remaining amount on your 2021 tax return if that is when you receive the money.
To e-file, enter the 1099 as business income. Then, enter an amount of other business income not on a 1099 that is a negative number that offsets the money that you did not receive in 2020.
Or, if you want to print your return and file by mail, enter the 1099 using only the amount of money that you actually received. Attach a copy of the 1099 to your printed tax return along with a letter of explanation saying why you did not report all the income. Don’t attach other proof, save it in case the IRS asks you later.
