Filing protective claims

This Q&A from the AICPA and WICPA can help your firm decide whether to file protective claims for clients prior to the Supreme Court making a decision about the Affordable Care Act.

In March of this year, the U.S. Supreme Court announced that it will hear a case that challenges the constitutionality of the individual mandate under the Patient Protection and Affordable Care Act (ACA). (The original case, Texas v. U.S., is now docketed in the Supreme Court as California v. Texas.) It is possible that if the individual mandate is held to be unconstitutional, income taxes established under the ACA, such as the Net Investment Income Tax (NIIT), may effectively be repealed. Accordingly, any ACA-related income taxes paid in prior years, including the individual shared responsibility penalty, may be refundable if a claim for refund is filed in a timely manner. The Supreme Court did not accept the case for an expedited review, so it will be some time until the case is heard. Some practitioners were wondering if their clients should file protective claims for any years about to expire, especially since claims for the 2016 tax year were due July 15, 2020. The AICPA did not take a formal position on filing a protective claim by July 15. The AICPA’s conversations with Tax Executive Committee, Employee Benefits TRP and Tax Practice and Procedures Committee members who deal with the ACA helped to inform the conclusion that there is little chance of the tax being declared unconstitutional for tax years before 2019. Most national and regional CPA firms did not recommend that their clients file a protective claim. Protective claims must be filed on a reasonable basis; if the Supreme Court declares the ACA unconstitutional, it is unlikely that it would be retroactive, and therefore, protective claims filed now could be considered baseless claims. Following are some questions and answers to help determine whether filing a protective claim is the right decision for you and your clients. You can also watch this free AICPA Tax Section Odyssey Series video at tiny.cc/regmsz to learn more.

“It is possible that if the individual mandate is held to be unconstitutional, income taxes established under the ACA may effectively be repealed.

1. Why is Texas v. United States important?

The case of Texas v. United States has brought forward a discussion of protective claims that we have not had since Quality Stores. In Quality Stores, the issue was whether severance payments were subject to employment taxes. Texas v. U.S. involves a case brought by several state governors who are challenging the constitutionality of the

Affordable Care Act (ACA). The Supreme Court will hear arguments that address the constitutionality of the ACA, with a decision likely to come out next spring.

2. Is there a reasonable possibility that the Supreme Court would find the ACA unconstitutional retroactively, back to at least 2016?

Firms are grappling with whether they should file protective claims regarding the case. If a protective claim is filed, it must be on a reasonable basis; some firms don’t think it is reasonable that even if the Supreme

Court deems the ACA unconstitutional, it will do so retroactively to 2016. These firms believe if a claim is filed, it will likely be thrown out as baseless. Many firms are not filing claims, but there is a risk with that as well. Other firms are telling their clients to consult their attorneys. The AICPA concluded that there is little chance of the tax being declared unconstitutional for tax years before 2019

(2019 is different, as that is the year the 2017 Tax Cuts and Jobs Act effectively eliminated the individual health insurance penalty). Almost all national and regional CPA firms have reached the same conclusion, and as such, they are not recommending that their clients go through the expense of filing a protective claim. The AICPA is making the same recommendation and does not advise action.

3. If deemed unconstitutional, can we expect the Supreme

Court to make it retroactive to 2016?

Some firms think it’s a stretch that, if deemed unconstitutional, the Supreme Court would look back retroactively to 2016. But if it’s found unconstitutional and retroactive to 2016, then there could be a problem: The statute ran out on the 2016 tax year on July 15. Taxpayers who paid these taxes with their 2016 federal tax returns lost any opportunity to claim a 2016 tax refund if they didn’t file a protective claim for refund. For extended returns, the claim would be due three years from the date of filing. While we can’t be certain, it would be a stretch for the

Supreme Court to make it retroactive back to 2016. That’s why firms are saying that even if they filed protective claims, they could be considered baseless claims because the chances are slim.

4. If I decide to file a protective claim for my client, how do

I do it?

a. Include name, address, TIN, year of refund claim, dollar amount of claim and explanation to alert the

IRS of the basis of the claim. b. The entire copy of the originally filed return does not need to be attached; attach the first two pages, but even these aren’t required. c. You will almost always have to file a perfecting claim for refund once the uncertainty is resolved.

While sometimes taxpayers know the dollar amount of the claim, generally they do not. Because of the uncertainty, the IRS almost never processes, nor will they ever process, these claims. However, sometimes they do when the claim amount is clearly identified, and the protective claim can be easily processed.

Generally, taxpayers must file a perfecting claim once the uncertainty is resolved. d. Like any amended return, enough information must be provided so that the IRS can identify the taxpayer and understand the basis and dollar amount of the claim.

5. A protective claim frequently shows a dollar amount of $1. Why?

Because an amended return extends the assessment statute of limitations (SOL) — but only to the extent of the dollar amount of the allowed claim — if a taxpayer indicates a dollar amount of $1 but then perfects the amended return to $10,000, the SOL will be extended, but it will be limited to $10,000 instead of $1. With the potential refund of NII tax, the theory is that if you identify the dollar amount of the tax and the Supreme Court rules that the applicable law is unconstitutional, because there will be so many protective claims filed, the IRS will simply refund the dollar amount identified in the protective claim, and the taxpayer will not have to file a second amended return to perfect the protective claim. However, the usual procedure is that once the uncertainty is removed, the taxpayer must perfect the protective claim.

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Kayla Frank, tax associate with Baker Tilly Virchow Krause LLP in Madison, has been named a 2019 Elijah Watt Sells Award winner. She graduated in May 2019 with a bachelor’s degree in accounting from UW–Oshkosh.

Lydia Glatzel has been hired by Vrakas S.C., Brookfield, as an audit associate.

Todd W. Gray, CPA, has joined von Briesen & Roper s.c. as a senior consultant, expanding their school law practice. Gray most recently was superintendent of the Waukesha School District. He holds several advanced education degrees and a Master of Science in accounting.

Ryan Hanson, CPA, financial accounting manager for Mortgage Guaranty Insurance Corp., has been named Volunteer of the Year by the Insurance Accounting & Systems Association Inc. (IASA). He serves as vice president of education on the IASA management team.

Nicholas Hinz, CPA, was promoted to partner in the Madison office of Baker Tilly Virchow Krause LLP. His service/industry area is assurance/manufacturing and distribution.

Mark Johannsen, CPA, a retired WICPA member, has joined the Eagle River Historical Society advisory board.

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Thomas Kieffer, CPA, CFP, CTFA, has been promoted to vice president–senior trust administrator for Prairie Trust, a division of Waukesha State Bank. He has more than 30 years’ experience.

Ryan Lay, CPA, was promoted to partner in the Milwaukee office of Baker Tilly Virchow Krause LLP. His service/ industry area is assurance/not-for-profit.

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Bill Merrick, CPA, has been appointed to the board of directors of the Wisconsin Center for Investigative Journalism. The Center collaborates with (but is independent of ) the UW–Madison School of Journalism and Mass Communication and news organizations across the nation. Its investigations focus on government integrity and quality of life issues important to the people of Wisconsin.

Sydney Nelson, a senior internal auditor for Aurora Health Care, was named a Distinguished Alumna of the University of Wisconsin–Whitewater.

Matt Nitka, CPA, was promoted to partner in the Milwaukee office of Baker Tilly Virchow Krause LLP. His service/industry area is assurance/financial services.

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Joseph J. Placek, CPA, has joined Sitzberger & Co. S.C., Brookfield, as an audit manager.

Isaac Pooler, CPA, an audit associate with Hawkins Ash CPAs, has received his CPA designation from the Department of Safety and Professional Services. He joined the firm in 2017.

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ORGANIZATION NEWS

The following CPA firms were recipients of Best of the [Fox] Valley Awards in the Services category:

Best of the Valley

• Endries Otto CPAs (Principals: Randall R. Endries,

CPA; Mark W. Otto, CPA)

Finalists

• John D. Helgeson, CPA • V V H & Associates (Principals: Scott R. Vanden

Heuvel, CPA; Todd J. Hietpas, CPA; and Todd D.

Vanevenhoven, CPA)

The annual awards program is coordinated by the USA TODAY NETWORK | LocalIQ Wisconsin Conceptual Marketing Department.

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