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Supreme Court to Rule on Constitutionality of the Affordable Care Act – Should You File a Refund Claim?

8.3.20

Taxpayers need to be aware of a potential refund claim opportunity that is time sensitive. Taxpayers subject to the Net Investment Income Tax (NIIT) and the Additional Medicare Tax in tax years 2016 through 2019 may be able to claim a refund of those taxes contingent on the ruling of the U.S. Supreme Court that is anticipated to be made in early 2021. While the ruling will not be known until next year, a protective refund claim may be required now to secure the right to claim a refund that is contingent on the results of the case.

Background State of Texas v. United States

A petition was granted by the United States Supreme Court to review an Appeals Court decision in Texas v. United States. This case hinges on the constitutionality of the individual mandate included in the Affordable Care Act (ACA). You may recall the Supreme Court ruled the ACA to be constitutional in 2012; however, the issue has resurfaced thanks to the reduction of the individual mandate as part of the Tax Cuts and Jobs Act passed in late 2017. This revision to the individual mandate reducing the penalty to zero, which became effective beginning in 2019, sparked additional litigation alleging the individual mandate is unconstitutional.

There is speculation that the ruling by the Supreme Court may also include a determination of whether two separate additional taxes will be deemed unconstitutional. The ACA includes the .9% Additional Medicare Tax, which is imposed on those with adjusted gross income (AGI) over $200,000 for single taxpayers and $250,000 for married taxpayers. A related legislation, passed immediately after the ACA, the Health Care and Education Reconciliation Act of 2010 (HCERA), contains the 3.8% NIIT. These two taxes could factor into the decision made by the Supreme Court in early 2021.

Benefits of Filing a Protective Refund Claim

Since the taxes at question were imposed during the 2016 and 2017 tax years, there is a possibility that a refund opportunity will exist for those years if the ACA is deemed unconstitutional. Since the issue at hand is still under litigation, a formal refund claim cannot be made; however, the end of the statute of limitations period for filing a refund claim for the 2016 and 2017 tax years is coming to a close for some taxpayers. Taxpayers who paid a significant amount of the Additional Medicare Tax or NIIT in 2016 and 2017 should seriously consider filing a protective refund claim and must do so within three years after the date they filed their original return. This protective refund claim will allow for the filing of a formal refund claim by leaving the statute of limitations open until all contingent issues are known. If considering a protective refund claim for 2016, it is a good idea to file one for 2017 with the uncertainty of the timing of the decision.

Risks of Filing a Protective Refund Claim

There is no guarantee that the Supreme Court will find the ACA unconstitutional, and, even if it does, there is no guarantee that its ruling will create a refund opportunity for taxes paid in 2016 and 2017. In fact, since the Supreme Court previously ruled that ACA was constitutional back in 2012, and the change resulting in the case being heard now is effective beginning in 2019, it is likely that any ruling would only impact the Additional Medicare Tax or NIIT for 2019 and beyond. In addition to the low likelihood of retroactively eliminating these taxes, a protective refund claim could open a tax year for additional review rather than closing the statute of limitations on that year. This additional scrutiny may result in the Internal Revenue Service (IRS) wanting to take a closer look at the remaining open tax years creating an additional administrative burden.

Cost Benefit Analysis

It is clear a cost-benefit analysis should be undertaken for all taxpayers in this scenario. If Additional Medicare Tax or NIIT was paid during 2016 or 2017, taxpayers should analyze the risk of additional scrutiny on other items in returns for 2016-2019 against the potential benefit of the refund claim. The analysis should be done with the advice of a tax professional that can navigate the complexity of the issue at hand, as well as completely and accurately file the protective refund claim in accordance with IRS standards. For those in need of assistance, the tax professionals at Dannible & McKee are experts at guiding taxpayers through the process. Feel free to contact your Dannible & McKee partner representative.

 

Contributing author: Nicholas L. Shires, CPA is the partner-in-charge of tax services at Dannible & McKee, LLP.  Nick has over 19 years of experience providing tax and consulting services to a wide range of clients, including individuals and privately held companies. For more information on this topic, you may contact Nick at nshires@dmcpas.com or (315) 472-9127.