Protective Claim for Refund

Tuesday, April 2, 2013

Amid Constitutional Challenge, A Chance For Same-Sex Couples to Recoup Overpayments in Taxes

April-15Last week, the United States Supreme Court heard two very important cases concerning the federal rights and benefits of LGBT individuals throughout the country.  In particular, the case of Windsor v. United States presents a very real opportunity for the Supreme Court to consider and possibly to strike down the Federal Defense of Marriage Act (DOMA).  The whole country is intently watching and waiting, and the outcome of the Proposition 8 case and the DOMA case will directly impact the LGBT community, particularly the federal rights of married same-sex couples.

DOMA Has Resulted in a Higher Tax Burden for Same-Sex Married Couples.

Since 1996, DOMA, the federal law which defines marriage as the legal union of one man and one woman, has resulted in the non-recognition of same-sex marriage for federal purposes.  As a result, many of the benefits afforded to opposite-sex married couples are denied to their same-sex counterparts.  Some of these benefits include Social Security Administration benefits, marital estate tax exemption, tax treatment of health insurance premiums, and most important for the purposes of this article, the filing of joint tax returns.

If DOMA is Held to be Unconstitutional, Same-Sex Married Couples May Be Entitled to Amend Previous Tax Returns to Obtain Refunds for Overpayments Made Under the Unlawful Act.

If DOMA is struck down by the Court, an outcome which appears to be at least somewhat likely, same-sex married couples who were excluded from filing joint income tax returns will have the ability to file amended income tax returns for the years they were legally married but did not have the ability to file jointly due to DOMA.

However, because federal income tax returns are only amendable for three years (or two years from the date the tax was paid), same-sex couples will lose their right to amend returns outside the time limitation unless additional steps are taken to protect the ability to amend in the future.

Same-Sex Couples Should Consider Filing a "Protective Claim" Now to Preserve the Right to Amend Returns Beyond the IRS's 3-Year Limit.

Because the IRS limits a taxpayer's right to amend previous returns to three years, one recommended solution to this problem is the filing of a “Protective Claim for Refund”.  Filing a Protective Claim now allows a taxpayer to file an amended return at some future date when the refund resulting from that amended return is contingent on some future event (such as the Court’s decision in the DOMA case).

For example, a taxpayer who believes she would be entitled to an additional refund for tax year 2009 may file a Protective Claim at any point prior to April 15, 2013, thus preserving her right to amend her 2009 tax return in the event that DOMA is overturned later this year.  As an article in The Tax Advisor explained in December, 2012:

[Tax preparers] should discuss with their same-sex married clients whether to file protective individual income tax refund claims with the IRS using the married-filing-jointly status and other tax benefits that are currently available to opposite-sex married taxpayers.

A protective refund claim can be submitted as a formal written claim or as an amended return on Form 1040X, Amended U.S. Individual Income Tax Return. A protective claim is filed by a taxpayer when the right to the refund is contingent upon the finalization of litigation proceedings such as the constitutionality of DOMA. A protective refund is filed for a taxpayer when the resolution of the litigation will extend beyond the statute of limitation for filing an accurate amended tax return (IRS Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, p. 14 (2008)).

The same-sex couple must be legally married under state law at the end of the year for which the amended return for the protective claim is filed. A document, such as a marriage certificate, confirming the marriage should be attached to the amended return.

In addition to the above article, Internal Revenue Service Publication 556 provides a helpful checklist for sames-sex couples who may be entitled to a tax refund if DOMA is overturned.  IRS Publication 556 reads, in relevant part, as follows:

Protective claim for refund.   If your right to a refund is contingent on future events and may not be determinable until after the time period for filing a claim for refund expires, you can file a protective claim for refund. A protective claim can be either a formal claim or an amended return for credit or refund. Protective claims are often based on current litigation or expected changes in the tax law, other legislation, or regulations. A protective claim preserves your right to claim a refund when the contingency is resolved. A protective claim does not have to state a particular dollar amount or demand an immediate refund. However, to be valid, a protective claim must:

  • Be in writing and be signed,
  • Include your name, address, social security number or individual taxpayer identification number, and other contact information,
  • Identify and describe the contingencies affecting the claim,
  • Clearly alert the IRS to the essential nature of the claim, and
  • Identify the specific year(s) for which a refund is sought.

Generally, the IRS will delay action on the protective claim until the contingency is resolved. Once the contingency is resolved, the IRS may obtain additional information necessary to process the claim and then either allow or disallow the claim.

Mail your protective claim for refund to the address listed in the instructions for Form 1040X, under Where To File.

Taxpayers who believe a Protective Claim for Refund may be beneficial should consult his or her tax adviser to discuss the possible advantages and disadvantages to filing a Protective Claim for Refund prior to April 15, 2013.




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