PORTFOLIO

Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation (Portfolio 627)

The procedural aspects of the tax law are of overriding importance in many controversies, eclipsing or making moot substantive issues such as the allowance of deductions or credits, recognition or deferral of income, and methods of accounting. This Portfolio is devoted, in part, to the statutes of limitations on assessment and collection. While the rules of general application are found in §§6501(a) and 6502, there are myriad special rules in §6501 and other Code sections. The complementary statutes of limitations on credits and refunds are also explained. Most of these statutes are found in §6511. They prescribe the various deadlines for filing claims as well as the limitations on the amount of credit or refund allowable.

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DESCRIPTION

The procedural aspects of the tax law are of overriding importance in many controversies, eclipsing or making moot substantive issues such as the allowance of deductions or credits, recognition or deferral of income, and methods of accounting. Limitations Periods, Interest on Underpayments and Overpayments, and Mitigation (627-4th) is devoted, in part, to the statutes of limitations on assessment and collection. While the rules of general application are found in §§6501(a) and 6502, there are myriad special rules in §6501 and other Code sections. The complementary statutes of limitations on credits and refunds are also explained. Most of these statutes are found in §6511. They prescribe the various deadlines for filing claims as well as the limitations on the amount of credit or refund allowable.


Additionally, the Portfolio addresses the rules on interest payable to and by the IRS. Interest is generally payable to the IRS under §6601 on underpayments of tax from the last date prescribed for payment to the date of payment. Because of delays in collection and allowance of credits and refunds, the amount of interest payable can often exceed the amount of tax at issue. On overpayments of tax, interest is generally payable to the taxpayer under §6611 from the date of the overpayment until a date no more than 30 days before the date of the refund check. Where the overpayment is credited, interest stops on the due date of the amount against which the credit is taken. If the IRS fails to pay the correct amount of overpayment interest, the taxpayer can sue for the additional amount due. Global interest netting was made available by the enactment of §6621(d) in 1998.


To afford a measure of relief from the operation of the statutes of limitations and other rules of law preventing the correction of errors, Congress has enacted a series of rules — known as the mitigation provisions — which are also discussed in this Portfolio. Since enactment in 1938, the mitigation rules have been a source of confusion and controversy. The rules in §§1311-1314 permit an adjustment in income tax liability for the year of the error under certain conditions, to eliminate a double tax benefit or detriment. Lastly, the Portfolio includes an explanation of the rules in §6521, permitting mitigation for errors in applying the definitions of self-employment income and wages.


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AUTHORS

THEODORE D. PEYSER
Theodore D. Peyser (deceased), B.A., Princeton University (1950); LL.B., Yale Law School (1955); member, District of Columbia, Tax Court, Court of Federal Claims, Federal Circuit, and U.S. Supreme Court Bars; member, Court Procedure Committee, Tax Section, ABA; Tax Division, U.S. Department of Justice, trial attorney (1955–1973), chief, Claims Court Section (1974–1984), Special Litigation Counsel (1985–1987); author, 631 T.M., Refund Litigation and 628 T.M. Transferee Liability; co-author, 630 T.M. Tax Court Litigation; contributor, Tax Management Tax Practice Series.

TABLE OF CONTENTS

Detailed Analysis

I. Statutes of Limitations on Assessments and Collection of Tax

A. In General

B. General Rules of § § 6501(a) and 6502

1. Tax

2. Interest on Underpayments of Tax

3. Additions, Additional Amounts, and Assessable Penalties

4. NOL and Credit Carryover Corrections Not Barred by Expiration of Assessment Period for Loss Year

C. The Filing Date of a Return

1. In General

a. Statutory Mailbox Rule

b. Designated Private Delivery Services

c. Electronic Postmarks

2. Returns Filed Early

3. Returns of Certain Employment Taxes and Withholding

4. Returns Executed by the IRS

5. Excise Tax Returns

D. Rules Relating to Special Situations

1. Extension of Time for Assessment by Agreement or Consent

2. False Returns

3. No Return

4. Willful Attempt to Defeat or Evade Tax

5. Omissions from Return

a. Income Tax

b. Estate and Gift Taxes

c. Excise Taxes

d. Employment Taxes

e. Omissions Due to Fraud

6. Failure to Report Listed Tax Avoidance Transactions

7. Erroneous Reporting of Gifts

a. Gifts Made in the Period October 9, 1990, through December 31, 1996, Subject to Special Valuation Rules

b. Gifts Made After December 31, 1996

8. Personal Holding Company Tax

9. Request for Prompt Assessment

10. Wrong Return Filed in Good Faith

a. Trusts and Partnerships

b. Exempt Organizations

c. DISCs

d. Gifts

11. Revocation of Tax-Exempt Status of Churches and Liability for Unrelated Business Income Tax

12. Net Operating Loss and Capital Loss Carrybacks

13. Foreign Tax Carrybacks

14. Business Credit Carrybacks

15. Tentative Carryback Adjustments

16. Private Foundations and Certain Other Organizations

a. The Triggering Return

b. Tax on Failure to Distribute Income

c. Tax on Termination of Private Foundation Status

17. Pass-Through Items

a. Partnership Items Under the Unified Audit Rules

b. Partnership Items Under the Simplified Audit Procedure

c. Other Pass-Through Items

18. Transferees and Fiduciaries

19. The Donee's Liability for Gift Tax

20. Joint Return After Filing Separate Returns

21. Certain Amended Returns

22. Transfers to Foreign Persons

23. Additional Estate Tax Resulting from a Refund of Death Tax

24. Additional Income Tax Resulting from a Reduced Foreign Tax Credit

25. Discharge of Fiduciary from Personal Liability for Estate Tax

26. Involuntary Conversion

27. Excessive Refunds of Excise Tax

28. Mitigation

29. Activities Not Engaged in for Profit

30. Valuation of Certain Real Property for Purposes of the Federal Estate Tax

31. Equitable Recoupment

32. Reinstatement of Abated Assessment

33. Distributions of Controlled Corporation Stock

34. C Corporations and Their Shareholders

35. Responsible Person Penalty

36. Collection of Partnership Assessments

E. Suspensions of the Statutes of Limitations

1. In General

2. Notice of Deficiency

3. Assets in Court Control or Custody

4. Collection Due Process

5. Innocent Spouse Relief

6. Taxpayer Outside the United States

7. Extensions of Time for Payment of Estate Tax

8. Extensions of Time for Payment of Tax Attributable to Recoveries of Foreign Expropriation Losses

9. Wrongful Seizure or Lien on Property of Third Party

a. Wrongful Seizure

b. Wrongful Lien

10. Suspension Pending Correction - Private Foundation and Similar Taxes

11. Personal Holding Company Deficiency Dividends

12. Title 11 Bankruptcy Cases and Receiverships

a. Bankruptcy Cases

b. Receivership Proceedings

13. Transferees and Fiduciaries

14. Third-Party Summonses

15. Other Summonses

16. National Taxpayer Advocate Office/Taxpayer Assistance Orders

17. Designated Summonses

18. Presidentially Declared Disasters or Terroristic or Military Action

19. Postponement by Reason of Service in a Combat Zone or Contingency Operation

II. Statutes of Limitations on Credits and Refunds

A. In General

B. Dates on Which the Statute of Limitations Starts to Run

1. Date Return Is Filed

2. Date Tax Is Paid

a. In General

b. Advance Payments and Remittances Made Before Assessment

c. Income Tax Withheld and Estimated Tax Payments

d. Earned Income Credit

e. Social Security Taxes and Income Tax Withholding

f. Income Tax Credited to Estimated Tax

g. Payment of Federal Unemployment Tax

C. Limitation on the Amount Allowable

1. Claims Filed Within the Three-Year Period

2. Claims Filed Within the Two-Year Period

3. No Claim Filed

4. Limits on the Amount of the Credits and Refunds That Can Be Determined by the Tax Court

D. Rules Relating to Special Situations

1. Extension of the Time for Assessment

2. Filing of a Second Claim

3. Bad Debts and Worthless Securities

4. NOL and Capital Loss Carrybacks

5. Foreign Tax Credit

6. Business Credit Carrybacks

7. Self-Employment Tax

8. Income Recaptured Under Qualified Plan Termination

9. Self-Employment Tax Overpayments Determined by the Tax Court

10. Death Taxes

a. Credit for State and Foreign Death Taxes

b. Deduction for State Death Taxes

11. Personal Holding Company Deficiency Dividends

12. Postponement by Reason of Service in a Combat Zone or Contingency Operation

13. Postponement by Reason of Presidentially Declared Disaster or Terroristic or Military Action

14. Tentative Carryback and Refund Adjustment

15. Tentative Refund for Claim of Right Adjustment

16. Mitigation Overpayments

17. Joint Return After Filing Separate Returns

18. Claims for Refund of Tax on Gasoline Used for Farm and Nonhighway Purposes

19. Tax Treaties

20. Retroactive Relief

21. Partnership and Subchapter S Items

22. Responsible Person Penalties

23. Implied-in-Fact Contracts with the IRS

24. Quiet Title Actions

25. Financial Disability

26. Postponement by Reason of Y2K Failures

E. Equitable Tolling

F. Overpayments Determined by the Tax Court

G. Suits for Refund

H. Suits for Erroneous Refunds

III. Interest on Underpayments

A. The Use-of-the-Money Principle

B. Period for Which Underpayment Interest Is Payable

1. General Rule of § 6601(a)

2. The Date Interest Begins to Accrue

a. In General

b. Extensions of Time

c. Installment Payments of Excise Tax

d. Jeopardy Assessments

e. Accumulated Earnings Tax

f. Taxes Payable by Stamp and Cases Where Last Date for Payment Is Not Prescribed

g. Penalties, Additional Amounts, and Additions to Tax

h. Refunds of Foreign Tax

i. Additional Estate Tax Under § 2032A(c)

3. Date on Which Underpayment Interest Terminates

a. In General

b. Deposits in the Nature of a Cash Bond

c. Credits

d. Waiver of Restrictions on Assessment

C. Special Rules

1. Carrybacks

a. Net Operating Loss and Capital Loss Carrybacks

b. Foreign Tax Credit Carrybacks

c. Business Credit Carrybacks

d. Displaced Carrybacks

2. Collection of Underpayment Interest

3. Estimated Tax

4. Federal Unemployment Tax

5. Erroneous Refunds

6. Service in Combat Zone or Contingency Operation

7. Federally Declared Disasters and Terroristic or Military Actions

8. Bankruptcy

9. Employment Tax Adjustments

D. Rate of Underpayment Interest

1. General Underpayment Rate

2. Increase for Large Corporate Underpayments

3. Two Percent Rate on Installments of Estate Tax

4. Global Netting

a. Netting for Interest for Periods Beginning After July 22, 1998

b. Netting for Interest for Periods Beginning Before July 22, 1998

5. Tax Motivated Transactions Under Prior Law

E. Abatement of Interest

1. Global Netting

2. Mathematical Errors by IRS

3. Errors and Delays by the IRS

4. Interest on an Assessment of an Erroneous Refund

5. Suspension of Interest for Failure to Contact Taxpayer

6. Judicial Review of Denials of Requests for Abatement of Interest

F. Federal Income Tax Treatment of Underpayment Interest

IV. Interest on Overpayments

A. Requirement of the IRS to Pay Overpayment Interest

B. Overpayment Rate

C. The Period for Which Overpayment Interest Is Payable

1. In General

2. Date of Overpayment: When Interest Commences

a. In General

b. Estimated Tax Payments and Income Tax Withholding Credits

c. Advance Payments and Remittances Made Before Assessment

d. Late Returns

e. Refunds Within 45 Days of Filing the Return

f. Refunds Within 45 Days of Other Actions

g. Income Tax Refunds Resulting from a Carryback

h. Judgments for Overpayments

3. Date on Which Interest Ceases to Accrue

a. Refunds

b. Credits

D. Situations Where No Overpayment Interest Is Allowable

1. Personal Holding Company Tax

2. Employment Taxes

3. Excise Taxes

4. Fuel Taxes

5. Estate Tax

6. Deposits in the Nature of a Cash Bond

E. Procedure for Obtaining Overpayment Interest

F. Federal Income Tax Treatment

V. Mitigation of Limitations and Other Rules (Income Tax)

A. Purpose of the Mitigation Provisions

1. In General

2. Historical Background

B. Requisites for an Adjustment

C. Tax Subject to Mitigation

D. Qualifying Reasons Barring Correction of Errors

E. Requirements for an Adjustment

1. Determination

a. Final Action by a Court

b. Closing Agreement

c. Final Disposition of a Claim for Refund

d. Agreement Under § 1313(a)(4)

2. Determinations as to a Related Taxpayer

3. Circumstances of Adjustment

a. Inconsistent Position

(1) Actions Which Constitute Maintenance of a Position

(2) Positions Which Are Inconsistent

(3) Interaction with § 481

b. Double Inclusion of an Item of Gross Income

c. Double Allowance of a Deduction or Credit

d. Double Exclusion of an Item of Gross Income

e. Double Disallowance of a Deduction or Credit

f. Correlative Deductions and Inclusions for Trusts and Estates Legatees, Beneficiaries, or Heirs

g. Correlative Deductions and Credits for Certain Related Corporations

h. Basis of Property After Erroneous Treatment of a Prior Transaction

(1) The Determination Must Determine the Basis of Property

(2) Taxpayer with Respect to Whom the Erroneous Treatment Occurred

(a) Taxpayer with Respect to Whom the Determination Is Made

(b) Taxpayer Who Acquired Title to the Property in the Transaction and from Whom the Taxpayer with Respect to Whom the Determination Is Made Derived Title

(c) Taxpayer Who Had Title at the Time of the Transaction and from Whom the Taxpayer with Respect to Whom the Determination Is Made Derived Title, if the Basis in the Hands of the Taxpayer Is Determined Under § 1015(a) Relating to the Basis of Property Acquired by Gift

(3) Prior Erroneous Treatment

(a) Erroneous Inclusion in, or Omission from, Gross Income

(b) Erroneous Recognition, or Nonrecognition, of Gain or Loss

(c) Erroneous Deduction of an Item Properly Chargeable to Capital Account or an Erroneous Charge to Capital Account of an Item Properly Deductible

F. Amount and Method of Adjustment

1. Amount of Adjustment for the Year of the Error

2. Amount of Adjustment for Other Tax Years Based on a NOL or Capital Loss Carryback or Carryover

3. Method of Adjustment

VI. Mitigation of Limitations for Self-Employment and Social Security Taxes

A. Requirements for a Credit Under § 6521

B. The Applicability of § 6521 to an Employer


WORKING PAPERS

Working Papers

Table of Worksheets

Additional Resources

Worksheet 1 Riders to Consent Forms 872, 872-B, and SS-10 to Extend Statute of Limitations for Both Parent Corporation and Its Subsidiaries

Worksheet 2 Statute of Limitations Tacking Examples

Bibliography

OFFICIAL

Statutes:

Public Laws:

Legislative History:

Announcements and Notices:

Treasury Rulings:

Cases:

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