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.

We recently advised you of a tax refund opportunity for 2016 and later years that expires on July 15. Earlier this 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). When the ACA was enacted, it contained certain tax provisions that affected many individual taxpayers and also 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. 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.

For example, if you filed your 2016 tax return by April 15, 2017, the statute of limitations to file a protective claim for the 2016 tax year would have expired on April 15, 2020. However, for 2016 tax returns, the normal April 15, 2020, deadline to claim a refund by filing an amended return has been extended to July 15, 2020, which we wrote about in this Alert.

Protective claims are filed to preserve the taxpayer's right to claim a refund when the  right to the refund 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

With July 15 almost here, a quick decision must be made to file and preserve any right for a refund in the event the Supreme Court rules in the taxpayers' favor. While anything could happen in the Court, we 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 2016, the year the statute closes on July 15 for timely filed 2016 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.