October 20, 2020

Volume X, Number 294

October 19, 2020

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Protecting Your Potential Tax Refund Should the Affordable Care Act’s Individual Mandate Be Determined Unconstitutional

The U.S. Supreme Court has taken up the case of whether the Patient Protection and Affordable Care Act (ACA)’s individual mandate is unconstitutional. A decision on this issue is likely not to occur until next year but protecting a possible tax refund cannot wait.

A claim for a tax refund must be made no later than three years from the filing of the income tax return in question or the refund will be barred. This means that any refund for taxes paid pursuant to the ACA for the year 2016 by an individual or a trust is the earliest year for which a refund can be claimed, assuming the 2016 return was filed on extension so that the three-year period has not yet run out. Although any refund at this point is speculative, there may be a way to protect a possible refund by filing what is known as a protective claim for refund.

A protective refund claim is used when the events establishing the right to the refund are not yet determined, i.e., the refund is contingent on future events, in this case, the Supreme Court decision. For the protective claim to be effective, you must: (1) put the Internal Revenue Service on written notice that you are asking for a refund; and 2) explain in writing the circumstances under which the refund would be due so that the IRS knows you are making a claim and what it is about. If, and when, a decision of the Supreme Court overturns all or part of the ACA, and the decision affects taxes paid for the 2016 tax year, the taxpayer “perfects” the protective claim by filing the actual refund claim on Form 1040X or 1041X, as appropriate.

Under the ACA, an additional Medicare tax of .9% on earned income of $200,000 for single individuals and $250,000 for married individuals filing jointly was due. If your income reached the relevant threshold, the additional Medicare tax should have been reported in your return on a Form 8959. In addition, the ACA imposed a 3.8% tax on net investment income for taxpayers earning these threshold amounts. This tax should have been reported in your return on a Form 8960.

Should the ACA be overturned in whole or in part, the Medicare tax and net investment income tax that was paid pursuant to the ACA may be refundable. This means that a taxpayer may wish to protect all years covered by the ACA for which the statute of limitations on refunds remains open. Filing a protective refund claim for the 2017 year before April 15 of next year (or the extended filing date) should also be considered prior to the refund expiration date and before the decision is rendered.

©2020 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume X, Number 211

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About this Author

Barbara Kaplan, Greenberg Traurig Law Firm, New York, Tax and Corporate Law Litigation Attorney
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Barbara T. Kaplan, named one of the top 50 women lawyers in New York City by Super Lawyers magazine, focuses her tax litigation practice on domestic and foreign corporations, partnerships, and individuals in federal, state, and local tax examinations, controversies and litigation, including administrative and grand jury criminal tax investigations.

Areas of Concentration

  • Tax compliance counseling

  • Offshore account reporting

  • Sensitive...

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Shira Peleg Associate New York Tax Audits, Litigation & Criminal Tax Defense State & Local Tax (SALT)
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Shira Peleg is an Associate in Greenberg Traurig’s Tax Practice. She represents clients before the Internal Revenue Service and state and local taxing authorities in examinations, appeals, court, and collections.

Concentrations

  • Federal and state controversies and litigation

  • Tax Audits

  • Offshore account reporting

  • Tax penalties

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G. Michelle Ferreira, Greenberg Traurig Law Firm, San Francisco, Silicon Valley, Tax And Private Fund Litigation Attorney
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G. Michelle Ferreira is an attorney in the Silicon Valley Office and counsels individuals, partnerships, estates and corporations in tax disputes with the Internal Revenue Service and state and local tax agencies, including the California Franchise Tax Board, the State Board of Equalization, the Employment Development Department and county assessment appeals boards.

As a former tax litigator for the Internal Revenue Service, Michelle brings unique experience to clients who have complex and sensitive tax and penalty disputes. Michelle represents...

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Scott Fink, Greenberg Traurig Law Firm, New York, Finance, Tax and Litigation Attorney
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Scott E. Fink specializes in civil and criminal federal and state tax controversies and litigation. He represents corporations, partnerships, estates and individuals before the Internal Revenue Service, and state and local tax authorities in examinations, collection problems, administrative appeals, and in court.

Areas of Concentration

  • Federal and state tax controversies and litigation

  • Tax audits

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Courtney Hopley, Greenberg Traurig Law Firm, San Francisco, Tax Law Attorney
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Courtney A. Hopley represents clients in federal and state tax controversies before the IRS and the California Franchise Tax Board at the audit, collection, appeals and litigation stages. She works on tax controversy matters involving partnerships, corporations, individuals, real estate and penalty disputes. Additionally, Courtney has experience in tax planning involving entity formation, mergers and acquisitions, and reorganization transactions.

Areas of Concentration

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