Problem:
Right click on an image and select "Set as desktop background", it pops up a window and complains that "This image can't be set as wallpaper. An internal error occurred".
Solution:
Incorrect permission on below file or the file is occupied by some other application:
%UserProfile%\AppData\Roaming\Microsoft\Windows\Themes\TranscodedWallpaper.jpg
Try to remove with administrator access or close application which occupies the file.