Sometimes you cannot change your desktop wallpaper in Windows 7. For example, you see a black background even though you change your background picture. Another instance is, when you try to right-click a picture and then select ‘Set as desktop background’, you will get an error message “This image can't be set as wallpaper. An internal error occurred”, etc.
This can be caused by one or more following reasons.
There are third-party applications like Display Manager from Samsung. (Resolution, uninstall)
Background setting in the power options is disabled
The Remove background images option is incorrectly checked (Control Panel\Ease of Access\Ease of Access Center\Make the computer easier to see)
Domain policy disables the background changing
Corrupted TranscodedWallpaper.jpg
You are using Windows 7 Starter or Windows 7 Home Basic; these versions of Windows 7 do not support changing the desktop background picture”If you have such an issue, just read this Microsoft article (KB2504610) to know how to fix it quickly.