A protective claim for refund may be filed by or on behalf of a taxpayer if the resolution of a tax refund claim is contingent on future events and may not be determinable until after the time period for filing a claim for refund expires. Protective claims are often based on current litigation or expected changes in the tax law, other legislation, or regulations. A protective claim preserves the taxpayer’s right to claim a refund once the contingent situation is resolved.
Currently the case of California v. Texas, now before the Supreme Court, creates such a contingency. The issue in this case is whether eliminating the individual mandate makes all or part of the 2010 Patient Protection and Affordable Care Act (“ACA” or “Obamacare”)1 unconstitutional. If the Court finds that the ACA is unconstitutional, taxpayers may be entitled to refunds for the taxes imposed by the ACA. But the Court is unlikely to come to a decision until late this year or possibly not until 2021.
Thus it is critical for taxpayers who in the last few years have paid the extra 0.9% Medicare tax on wages or self-employment income, or the 3.8% tax on net investment income, both taxes that were created as part of the ACA, to seriously consider submitting a protective claim for refund regarding these taxes. This will preserve the taxpayer’s right to a potential refund.
If the Court decides that refunds are available, such refunds would only be able to be claimed for years when the statute of limitations is still open. Since the statute of limitations is three (3) years from filing, if the taxpayer timely filed their 2016 Federal tax return, the protective claim for refund is due on July 15, 2020. If the taxpayer filed their return later (e.g. due to an extension) then the taxpayer still has the three (3) years, but the timing will be calculated from the date the return was filed. Since many taxpayers are filing an extension by July 15, 2020, they may send in the protective claim for refund now.
We have drafted a sample letter that may be used to file a protective claim for refund. The letter may be found here. We strongly recommend that you consult your tax return preparer about this procedure.
If you have any questions, concerns or would like to consult with one of our knowledgeable tax attorneys, please contact us.