Should You File A Protective ACA Refund Claim This Tax Season?

Well, this tax season sure has been different.  Most obviously, its been thoroughly disrupted by the COVID-19 pandemic, which has made it difficult for taxpayers and their return preparers to access information, assemble and transpose it into formal returns, and, for some, pay the taxes owed.  It got even more unusual when the federal and most state governments extended the traditional April 15th due date for 2019 individual returns, and the June 15th due date for 2020 individual estimated taxes, until July 15th.  But there’s yet another uncommon feature to this tax season that has been far less publicized.  Iarises indirectly from a legal challenge to the constitutionality of the Patient Protection and Affordable Care Act (the “ACA”), which was enacted way back in 2010. 

Recently, the Supreme Court decided to hear the consolidated cases of California, et al. v. Texas, et al. and Texas, et al. v. U.S., effectively agreeing to reconsider the constitutionality of the ACA.  You might ask why the Supreme Court would agree to hear these cases given that it already validated the constitutionality of the ACA in the 2012 case NFIB v. Sebelius.  The answer is that things have changed since 2012.  In NFIB v. Sebelius, the Court ruled that the federal government does not have the right to order people to buy health insurance but that the ACA’s minimum-essential-coverage requirement and associated penalties could lawfully be construed as a constitutionally permissible tax, thereby rendering them valid as enacted.  You may remember that decision because it was Chief Justice John Roberts himself who somewhat surprisingly sided with the four progressive justices to preserve the ACA. 

That, however, was 2012.  Now fast forward to 2017 when the political climate was quite a bit different.  A new President and a new Congress enacted the Tax Cuts and Jobs Act (the “TCJA”), eliminating the penalties associated with the ACA’s minimum-essential-coverage requirement, effective in 2019And therein lies the issue.  Remember that iNFIB v. Sebelius, the Supreme Court expressly relied on the existence of the ACA’s penalties to validate the Act’s constitutionality, but nowunder the TCJA, those very penalties are gone. 

The Supreme Court has therefore indicated that it will hear these new cases, likely in the fall, though it is of course unclear when the court will render its final decision.  When it does, probably after the election, it’s possible that the ACA will be declared unconstitutional in whole or in part.  It’s also possible that any such ruling will be applied (a) prospectively, (b) retroactively to 2019, when the mandate penalties were removed, or (c) retroactively to some other date.  We don’t know, and, of course, it’s also possible that the ACA will be held constitutional on other grounds.  Indeed, we don’t even know what the precise make-up of the high court will be when the case is heard, as much can happen in the span of a few months, especially given the ages and health statuses of certain justices. 

What we do know is that among the infinite potential outcomes lie a few that should be considered during the current tax season.  Two components of the ACA bear special importance in this context: 

  1. The additional 3.8% tax imposed on net investment income for taxpayers with higher levels of adjusted gross income; and 
  2. The additional 0.9% Medicare tax on earned income exceeding certain amounts. 

Anyone who has paid or is currently required to pay these amounts may ultimately be eligible to have them refunded if the Supreme Court’s decision directly or indirectly eliminates these components for years in which they were payable.  Simple enough.  But how far back can a refund claim go?  What about the statute of limitations? 

In general, the statute of limitations for filing a tax refund claim expires three years after the applicable return was filed or two years after the tax in question was paid, whichever is later.  Under these rules, the statute for most taxpayers’ 2016 returns would have expired on April 15thbut, due to the pandemic, the IRS extended this deadline.  In practical terms, this means that most refund claims for an individual’s 2016 tax year must be made by July 15th unless the 2016 return was filed on extension after July 15th, in which case a claim must be filed by the same date this year. 

For my part, I believe that, whether or not the constitutional challenge is successful, it is unlikely that a successful challenge would be applied retroactively before the repeal of the mandate penalty.  Therefore, I personally believe that the 2016 tax year is unlikely to be affected.  That being said, I also believe in being careful.  The downside of filing a protective claim for 2016, and even for 2017 and 2018 while you’re at it, is minimal – just in case the ACA is repealed retroactively to those years.  It’s also not especially difficult to file one.  The IRS has indicated that a valid protective claim doesn’t have to demand a specific dollar amount. A valid protective claim must: 

  1. Be in writing and signed; 
  2. Include the taxpayer’s name, address, SSN or ITIN, and other contact information; 
  3. Identify and describe the contingencies affecting the claim; 
  4. Clearly alert the IRS to the essential nature of the claim; and 
  5. Identify the specific year(s) for which a refund is sought. 

The protective claim can be mailed to the address listed in the instructions for Form 1040X under  Where To File, and the IRS generally will delay action on it until the underlying case is resolved. 

So yes, this tax season has been extraordinary.  In addition to everything going on with the pandemic, there is a significant constitutional challenge in place, of which taxpayers with higher levels of income and their return preparers should take note.