A protective claim can be either a formal claim or an amended return for credit or refund.

Prior to the due date of last year’s income tax returns, we alerted you to a tax refund opportunity for 2016 (and subsequent years) that expired last July 15 for those who filed timely for tax year 2016. Last year, the U.S. Supreme Court agreed to hear appeals in a case challenging the constitutionality of tax provisions of the Affordable Care Act (ACA). The case was argued before the Supreme Court in November 2020, with a decision expected this spring at the earliest or before the end of the current term in the summer of 2021 at the latest.

When the ACA was enacted, it contained certain tax provisions that affected many individual taxpayers, estates and trusts. In particular:

• The additional Medicare tax of 0.9 percent on earned income in excess of $200,000 for single filers or $250,000 for joint filers; and
• The net investment income tax of 3.8 percent that is imposed on single filers with adjusted gross income over $200,000 or joint filers with adjusted gross income over $250,000.

If the Court determines that these ACA tax provisions are unconstitutional, taxpayers who paid these taxes would be able to file an amended return to claim a refund for any tax year where the statute of limitations is still open.

Generally, the federal tax statute of limitations runs three years after you file your tax return. If your tax return was due April 15, but you filed early, the statute runs exactly three years after the due date, not the filing date. For example, if you filed your 2017 tax return by April 15, 2018, the statute of limitations to file a protective claim for the 2017 tax year expires on April 15, 2021. If you filed after April 15, the deadline would generally be three years following the actual filing date.

If either or both of these taxes are determined unconstitutional, taxpayers who file protective claims for a closed tax year before the statute of limitations expired will receive a refund for such closed tax year.

Protective claims are filed to preserve the taxpayer's right to claim a refund when that right is contingent on future events and may not be determinable until after the statute of limitations expires; hence, the “protective” nature of the claim.

A protective claim can be either a formal claim or an amended return for credit or refund. Protective claims are often based on current litigation or expected changes in the tax law, other legislation or regulations, as noted by the Supreme Court actions above. A protective claim preserves the taxpayer’s right to claim a refund once the contingency is resolved, and does not have to state a particular dollar amount or demand an immediate refund. Generally, the IRS will take no action on the protective claim until the particular contingency at issue is resolved.

TAG's Perspective

Many of our clients filed protective refund claims for tax year 2016. With April 15 about two months away, a quick decision should be made to file and preserve any right for a refund for tax year 2017 in the event the Supreme Court rules in the taxpayers' favor. While anything could happen in the Court, we continue to think the likelihood of these taxes being declared unconstitutional for tax years prior to 2019 is not in taxpayers’ favor. Recovery for such taxes paid for tax year 2019 may be different insofar as 2019 was the year the ACA individual health insurance mandate ended under the 2017 Tax Cuts and Jobs Act. While we believe there is little chance of recovery for tax year 2017, the year the statute closes on April 15 for timely filed 2017 income tax returns, taxpayers will need to assess risk versus reward and the expense versus upside of filing a protective refund claim.

For More Information

If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.