Statutes of limitation can produce results that look wrong. The IRS taxes an item this year that you already reported and paid tax on in a closed year. Or you deduct the same expense in two years, one of which is now closed. Without a special rule, the limitations periods would lock in the double hit or the double benefit.

Sections 1311 through 1314 of the Internal Revenue Code, called the mitigation provisions, are that special rule. They allow a correction in an otherwise closed year, but only in specific circumstances and only when specific conditions are met. This guide explains the structure.

The basic rule

Section 1311(a) says that if a determination, as defined in section 1313, is described in one or more paragraphs of section 1312, and on the date of the determination correction of the effect of the error is prevented by the operation of any law or rule of law other than the mitigation provisions and other than section 7122 on compromises, the effect of the error shall be corrected by an adjustment made in the amount and manner specified in section 1314.

So mitigation needs four things: a determination, a circumstance listed in section 1312, a bar to correction, such as the statute of limitations, and the conditions in section 1311(b).

What counts as a determination

Section 1313(a) lists them.

  • A decision by the Tax Court or a judgment, decree or other order by any court of competent jurisdiction, which has become final.
  • A closing agreement under section 7121.
  • A final disposition by the IRS of a claim for refund, with timing rules for when the claim is considered finally disposed of.
  • An agreement for purposes of the mitigation provisions signed by the IRS and the person, under the regulations.

An informal understanding does not qualify. The mitigation provisions work off one of these formal events.

The circumstances that qualify

Section 1312 lists the situations in which an adjustment is authorized. The most common are:

  • Double inclusion of an item of gross income: the determination requires inclusion of an item that was erroneously included in another year or by a related taxpayer.
  • Double allowance of a deduction or credit: the determination allows a deduction or credit that was erroneously allowed for another year or to a related taxpayer.
  • Double exclusion of an item of gross income, in two variations depending on whether the item was included on a return or tax was paid on it.
  • Double disallowance of a deduction or credit: the determination disallows a deduction or credit that should have been allowed in another year or to a related taxpayer.
  • Correlative items between estates or trusts and their beneficiaries, correlative items for related corporations and basis of property after erroneous treatment of a prior transaction.

If the situation is not on the list, mitigation does not apply, however unfair the result.

The inconsistent position requirement

Section 1311(b)(1) adds a condition that keeps the provisions balanced. Except in certain cases, an adjustment is made only if the party who benefits from the closed-year correction is not the party who took the position that created the problem.

Specifically, when the adjustment would be refunded to the taxpayer, the determination must adopt a position maintained by the IRS. When the adjustment would be assessed against the taxpayer, the determination must adopt a position maintained by the taxpayer. And in each case, that position must be inconsistent with the erroneous treatment in the closed year.

In plain terms: the IRS cannot tax an item in an open year while keeping the tax it collected on the same item in a closed year. A taxpayer cannot claim a deduction in an open year while keeping the benefit of the same deduction in a closed year. Whoever takes the inconsistent position opens the door for the other side.

Section 1311(b)(2) adds separate timing conditions for the double exclusion and double disallowance cases, requiring that correction was not already barred when the relevant position was first maintained.

Several circumstances reach related taxpayers. Section 1313(c) defines related taxpayer by relationship during the year of the error: husband and wife, grantor and fiduciary, grantor and beneficiary, fiduciary and beneficiary, legatee or heir, decedent and decedent's estate, partner or member of an affiliated group of corporations.

Section 1311(b)(3) adds that, for adjustments assessed like a deficiency, the relationship must exist when the taxpayer first maintains the inconsistent position, or at the time of the determination if the position was not maintained earlier.

How much time there is

Section 1314(b) is the key timing rule. The adjustment is made by assessing and collecting, or refunding or crediting, the amount as if it were a deficiency or an overpayment, and as if on the date of the determination one year remained before the expiration of the periods of limitation on assessment or filing a claim for refund for the year.

In practice, that gives about one year from the determination to make the adjustment. Miss it, and the closed year stays closed.

Section 1314(a) limits the amount to the increase or decrease in tax that results solely from correct treatment of the item that was the subject of the error, and section 1314(c) prevents the adjustment from being reduced or recovered by reference to other items. Section 1314(d) says the mitigation provisions do not apply to employment taxes under subtitle C.

An illustration

Suppose a taxpayer reported a payment as income in one year and paid tax on it. Years later, after that year has closed, the IRS determines in a Tax Court decision that the payment actually belonged in a later, open year and taxes it there. The same item has now been taxed twice: once in the closed year and once in the open year.

That is a double inclusion under section 1312(1). The determination is the final Tax Court decision under section 1313(a)(1). Correction of the closed year is barred by the refund statute. And the position adopted in the determination, that the item belongs in the later year, was maintained by the IRS and is inconsistent with the earlier inclusion, satisfying section 1311(b)(1)(A). Mitigation allows a refund for the closed year, computed under section 1314(a) based solely on the correct treatment of that item, as if one year remained on the refund period on the date of the decision.

The illustration shows the structure. Each element must actually be present in a real case.

Practical steps

  • Whenever an item is moved between years or between related taxpayers in an audit or settlement, ask whether the other year or taxpayer is closed.
  • Identify which section 1312 circumstance fits, if any.
  • Confirm the determination type under section 1313(a) and its date.
  • Check the inconsistent position requirement in section 1311(b)(1).
  • Calendar one year from the determination for the adjustment.

Where mitigation fits

Mitigation is one of the few statutory paths to correct a year that the assessment statute or the refund statute has closed. In United States v. Brockamp, 519 U.S. 347 (1997), the Supreme Court pointed to explicit exceptions like the mitigation provisions as part of the reason it refused to read an equitable tolling exception into section 6511. Congress wrote specific exceptions, and courts apply those rather than inventing new ones. The guide on equitable tolling covers that principle.

Section 6511(d)(2)(B) and (d)(4)(B) reflect the same idea for carrybacks: refunds attributable to those items may be allowed despite other rules of law, other than section 7122.

The bottom line

The mitigation provisions in IRC 1311 through 1314 let a closed year be corrected when a determination produces a double inclusion, double deduction or other listed inconsistency, the correction would otherwise be barred and the inconsistent position requirement is met. The adjustment is made as if one year remained after the determination. If you see the same item treated two ways across an open and a closed year, check these sections before you accept the result.