[Code of Federal Regulations]
[Title 26, Volume 18]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR301.6521-1]

[Page 388-389]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 301_PROCEDURE AND ADMINISTRATION--Table of Contents
 
                               Limitations
 
Sec. 301.6521-1  Mitigation of effect of limitation in case of related 
employee social security tax and self-employment tax.

    (a) Section 6521 may be applied in the correction of a certain type 
of error involving both the tax on self-employment income under section 
1401 and the employee tax under section 3101 if the correction of the 
error as to one tax is, on the date the correction is authorized, 
prevented in whole or in part by the operation of any law or rule of law 
other than section 7122, relating to compromises. Examples of such law 
are sections 6212(c), 6401(a), 6501, 6511, 6512(a), 6514, 6532, 6901 
(c), (d) and (e), 7121, and 7459(e).
    (b) If the liability for either tax with respect to which the error 
was made has been compromised under section 7122, the provisions of 
section 6521 limiting the correction with respect to the other tax do 
not apply.
    (c) Section 6521 is not applicable if, on the date of the 
authorization, correction of the effect of the error is permissible as 
to both taxes without recourse to such section.
    (d) If, because an amount of wages, as defined in section 3121(a), 
is erroneously treated as self-employment income, as defined in section 
1402(b), or an amount of self-employment income is erroneously treated 
as wages, it is necessary in correcting the error to assess the correct 
tax and give a credit or refund for the amount of the tax erroneously 
paid, and if either, but not both, of such adjustments is prevented by 
any law or rule of law (other than section 7122), the amount of the 
assessment, or the amount of the credit or refund, authorized shall 
reflect the adjustment which would be made in respect of the other tax 
(either the tax on self-employment income under section 1401 or the 
employee tax under section 3101) but for the operation of such law or 
rule of law. For example, assume that during 1955 A paid $10 as tax on 
an amount erroneously treated as ``wages'', when such amount was 
actually self-employment income, and that credit or refund of the $10 is 
not barred. A should have paid a self-employment tax of $15 on the 
amount. If the assessment of the correct tax, that is, $15, is barred by 
the statute of limitations, no credit or refund of the $10 shall be made 
without offsetting against such $10 the $15, assessment of which is 
barred. Thus, no credit or refund in respect of the $10 can be made.
    (e) As another example, assume that during 1955 a taxpayer reports 
wages of $4,200 and net earnings from self-employment of $900. By reason 
of the limitations of section 1402(b) he shows no self-employment 
income. Assume further that by reason of a final decision by the Tax 
Court of the United States, further adjustments to the taxpayer's income 
tax liability are barred. The question of the amount of his wages, as 
defined in section 3121, was not in issue in the Tax Court litigation, 
but it is subsequently determined (within the period of limitations 
applicable under the Federal Insurance Contributions Act) that $700 of 
the $4,200 reported as wages was not for employment as defined in 
section 3121(b). Therefore, the

[[Page 389]]

taxpayer is entitled to the allowance of a refund of the $14 tax paid on 
such remuneration under section 3101. The reduction of his wages from 
$4,200 to $3,500 would result in the determination of $700 self-
employment income, the tax on which is $21 for the year. Under section 
6521, the overpayment of $14 would be offset by the barred deficiency of 
$21, thus eliminating the refund otherwise allowable. If the facts were 
changed so that the taxpayer erroneously paid tax on self-employment 
income of $700, having been taxed on only $3,500 as wages, and within 
the period of limitations applicable under the Federal Insurance 
Contributions Act, it is determined that his wages were $4,200, the tax 
of $14 under section 3101, otherwise collectible, would be eliminated by 
offsetting under section 6521 the barred overpayment of $21. The balance 
of the barred overpayment, $7, cannot be credited or refunded.
    (f) Another illustration of the operation of section 6521 is the 
case of a taxpayer who, for 1955, is erroneously taxed on $2,500 as 
wages, the tax on which is $50, and who reports no self-employment 
income. After the period of limitations has run on the refund of the tax 
under the Federal Insurance Contributions Act, it is determined that the 
amount treated as wages should have been reported as net earnings from 
self-employment. The taxpayer's self-employment income would then be 
$2,500 and the tax thereon would be $75. Assume that the period of 
limitations applicable to subtitle A of the Code has not expired, and 
that a notice of deficiency may properly be issued. Under section 6521, 
the amount of the deficiency of $75 must be reduced by the barred 
overpayment of $50.