While the IRS uses the mitigation provisions of I.R.C. §§ 1311-1314 to reopen a taxpayer’s closed tax year and assesses tax deficiencies, it hardly facilitates taxpayers in using these provisions in similar fashion when seeking a refund from a closed year. Nonetheless, Congress intended that the mitigation provisions ensure that if certain prerequisites are met, either the government or the taxpayer may secure appropriate relief.
The mitigation provisions of I.R.C. §§ 1311-1314 provide a form of statutory relief and apply in certain limited circumstances to claims that are otherwise barred by operation of law or any rule of law like the statute of limitations. The goal of the mitigation provisions is to place the parties in the position they would have been in if the tax item(s) had been properly treated.
The party attempting to utilize the mitigation provisions of §§1311-1314 bears the burden of establishing the following requirements:
- There must be a “determination” as defined by Code Sec. 1313(a);
- The “determination” must be a specified circumstance of adjustment listed in Code Sec. 1312; and
- The party against whom the mitigation provisions are being invoked has maintained a position inconsistent with the challenged erroneous inclusion, exclusion, recognition, or nonrecognition of income.
The general rule found in I.R.C. §1311(a) provides:
(a) General rule – If a determination (as defined in section 1313) is described in one or more of the paragraphs of section 1312 and, on the date of the determination, correction of the effect of the error referred to in the applicable paragraph of section 1312 is prevented by the operation of any law or rule of law, other than this part and other than section 7122 (relating to compromises), then the effect of the error shall be corrected by an adjustment made in the amount and in the manner specified in section 1314.
As Congress’ goal with these provisions is to remedy certain “unfair results” that arise due to uncorrected errors, they only fix those unfair results that qualify as specific “problems” found in §1312. More importantly, fault is not an issue in making any determination whether the mitigation provisions should apply. Tax courts have reasoned that “these provisions equally apply to whoever made the mistake, and [such party] is entitled to correction of the error if merited.” Chertkof v. Commissioner, 66 T.C. 496, 503 (1976).
As an example, let’s look at the case of Costello v. Commissioner, TC Memo 2016-33. In this case, the provisions of §§1311-1314 were applied to a trust and its beneficiaries when the IRS examined the trust, made an assessment, and found that an error had occurred in reporting income. In this case, the IRS had examined a trust that had received a distribution from an IRA and, in the same tax year, had made distributions the trust’s two beneficiaries. They reported the tax and both received refunds. The IRS determined that the trust should have paid the tax rather than the beneficiaries.
Both beneficiaries accepted the changes in their returns that resulted in a refund. The net result of these changes was that the trust owed $38,838 more to the IRS than the IRS owed to the beneficiaries. Later, the trust filed an amended Form 1041 claiming an income distribution deduction. The IRS agreed with this assertion and accepted the trust’s claim for a refund. Meanwhile, the statute of limitations for assessments had expired on the individual returns. Thus, without the application of the mitigation provisions to this case, the IRS would not have been able to recover the refunds that had been issued to the beneficiaries. Thus, an unfair result for the IRS was thereby avoided by the application of §§1311-1314. However, it is important for taxpayers to remember that these mitigation provisions may be utilized on their behalf for “unfair results” that qualify under §1312.
Understanding and establishing the requirements imposed by §1311(a) is a complex legal analysis which requires the assistance of an experienced tax professional. Call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com today. For a FREE consultation call 212-490-0704.
