Potential Tax Refunds If SCOTUS Rules That Affordable Care Act Is Unconstitutional

July 15, 2020 Deadline for 2016 Protective Refund Claims for Taxpayers that Did Not Go on Extension For 2016

July 2020

In December 2019, the 5th Circuit Court of Appeals ruled that the individual mandate portion of the Affordable Care Act (the “ACA”) was unconstitutional. The Supreme Court of the United States (the “SCOTUS”) has agreed to hear this case in the fall of 2020 and will likely decide the ACA’s constitutionality in 2021.

The SCOTUS, in addition to determining the constitutionality of the individual mandate, may also have to determine whether it can be severed from the ACA. If the SCOTUS finds that the individual mandate is unconstitutional and cannot be severed from the ACA, the Supreme Court could render the entire ACA unconstitutional. If the entire ACA is rendered unconstitutional, both the 3.8% net investment income tax and the 0.9% additional Medicare tax (the “ACA Taxes”) could also be rendered unconstitutional.

The fate of both the ACA and the ACA Taxes is still up in the air. If the ACA and the ACA Taxes are rendered unconstitutional, it is unclear whether the ruling would be retroactive and therefore whether taxpayers could claim refunds for prior years. The statute of limitations for claiming a tax refund generally expires three years after the return has been filed. If the taxes are ruled unconstitutional for years, the statute of limitations to claim a refund for the 2016 tax year is the later of July 15, 2020 (due to an extension from April 15th for COVID-19 relief) or three years after you filed your 2016 tax return if on extension  The IRS allows taxpayers to file a “protective claim for a refund” based on expected changes to the tax law or legislation. Even though there is uncertainty regarding whether a taxpayer will be entitled to a refund for 2016, taxpayers can preserve their rights to claim a refund by filing a protective claim for that year.

In order to file a protective claim for a refund, a taxpayer must send a valid claim to the IRS. A valid claim, which can be a simple one-page request, is one that (i) is written and signed, (ii) includes the taxpayer’s name, address, SSN or ITIN, and other contact information, (iii) identifies and describes the contingencies affecting the claim, (iv) clearly alerts the IRS to the essential nature of the claim, and (v) identifies the specific year(s) for which a refund is sought. A valid protective claim does not have to list a dollar amount or demand an immediate refund and is not required to be in the form of an amended return.

Taxpayers may also wish to file a protective claim for a refund at this time for the 2017 tax year since the SCOTUS decision may not be rendered until after the statute of limitations to claim a refund for 2017 has expired.

Although the likelihood of receiving a refund may be low, we believe that taxpayers should consider filing a protective claim, especially considering the minimal time and costs to prepare a protective refund claim and the absence of any meaningful downside to filing the claim.