DOMA-Contingent Protective Claims Should Be Filed Before April 15, Practitioners Say
Tax practitioners are advising business and individual clients alike to file protective claims for tax refunds going back to 2009 before the statute of limitations expires on April 15, in advance of the Supreme Court possibly striking down the Defense of Marriage Act in June.
The filings are needed because same-sex married taxpayers could be due a refund on federal income taxes and Federal Insurance Contributions Act (FICA) taxes—collectively, Medicare and Social Security—they paid on employer-provided benefits that were added back in as taxable wages at the federal level, practitioners told BNA April 8. Employers can also file for a refund on their portion of FICA taxes paid on such benefits.
Unlike the tax treatment of different-sex married couples, DOMA generally prevents benefits such as health care coverage and group-term life insurance premiums from being excluded from federal taxable wages, resulting in an overstatement of both income and FICA wages, practitioners explained.
However, taxpayers would only be able to receive a refund on taxes paid on these overstated amounts if they meet the deadline for filing a protective refund claim to extend the statute of limitations going back to tax year 2009, practitioners said.
Since the Supreme Court heard oral arguments late March on United States v. Windsor (60 DTR GG-1, 3/28/13), an increasing volume of information has appeared about the impact that striking down DOMA would have on same-sex married couples’ right to file joint income taxes. However, the broader implications of the case are often being left out of the conversation, particularly the impact the court’s decision could have for the definition of marriage for the purposes of wages and employment taxes, Debera Salam, of Ernst & Young, told BNA.
While individual employees are responsible for filing a protective claim to receive a refund on their income taxes, a great deal of confusion persists about which parties have the right, or the obligation, to file a protective claim for a FICA refund, said Salam, head of Payroll Information Services at E&Y’s Employment Tax Advisory Services. Many employees may only file a protective claim for a refund on overstated income on their Form 1040 without specifying that they are also filing a claim for FICA taxes, because they assume it is the employer’s responsibility to correct an overstatement of FICA wages and collect the refund on their behalf, Salam said. If employees omit this reference to FICA in their claim, individuals risk forgoing what could be a substantial refund, she said.
Both an employer and an employee can file a protective claim for refunds by citing the pending DOMA decision, but employers are not obligated to do so on the employee’s behalf, and may not necessarily see much advantage in filing the claims, she said. ‘‘The reason I think employers may not be inclined to file the protective refund claim is that this is one of those cases when the employee would be more aware when it’s going to apply than the employer would,’’ Salam said.
Employers who decide not to submit a protective claim may want to consider notifying all employees of their decision ‘‘because you can never be sure who it really applies to,’’ and advise employees to file a protective refund claim for both individual and FICA taxes, she said. Employees should err on the side of caution by explicitly stating in their protective claim that they intend to file for a refund on both federal income tax and FICA tax, Salam said. Employees should also confirm with their employer that they are not also filing on their behalf, she added.
Wait and See Approach. There is a wide spectrum of decisions on DOMA that could be reached by the Supreme Court, with a similar range of prospective tax consequences, Ken Weissenberg, a partner at the accounting firm EisnerAmper, told BNA. If the court decides to allow the government to only recognize the marriages of same-sex couples who reside in a state that recognizes such marriages, those who do not reside in such states could be out of luck, he said. This could be the case even if the couple was legally married in a state that recognizes same-sex marriage, he added.
Nevertheless, these taxpayers should file protective claims anyway, Weissenberg said. ‘‘They might be the lucky couple that gets picked to challenge [Section 2] of DOMA, as opposed to [Section 3].’’ Section 2 of DOMA generally allows states not to recognize a same-sex marriage legal in another state, while Section 3, which is the issue before the court in the Windsor case, sets the definition of marriage as between one man and one woman, and generally prevents the federal government from recognizing same-sex marriages, regardless of their treatment under state law.
‘‘The good thing about protective claims is that you don’t have to put a dollar amount on them,’’ so taxpayers can perfect their claims at a subsequent date following the Supreme Court’s decision in order to reach an exact refund amount for taxes paid on benefits that would have been available to same-sex spouses, Weissenberg said.
Furthermore, if the Internal Revenue Service denies the claim by stating that spousal benefits are still taxable under current law, taxpayers will have two years from the date of denial to file a protest, so long as they met the deadline to extend the statute of limitations, Weissenberg said. ‘‘It’s a way to put a ‘wait-and-see’ approach in place,’’ he said.
Timing Issues. With so much left to be determined, many have understandably chosen to take the ‘‘wait and-see’’ approach to their filing obligations; however, April 15 is a clear deadline taxpayers cannot avoid if they hope to receive refunds on wages going back to 2009, Robert Newman and Richard Shea, of Covington & Burling LLP, told BNA.
Most practitioners do not expect the Supreme Court to set a specific date on which DOMA would become unconstitutional, thus allowing taxpayers to receive refunds available through the statute of limitations, said Newman, partner in the firm’s Employee Benefits and Executive Compensation practice group.
However, there are some exceptions for the upcoming filing deadline, he said. If an individual received a filing extension for their 2009 taxes, the deadline would be three years from the date the 2009 return was filed with the extension, said Newman. Employers, however, still only have until April 15 to file the protective claim for refund, he said.
If the Supreme Court does overturn DOMA in a way that allows for retroactive refunds, practitioners might expect the Internal Revenue Service to issue guidance within several months of the court decision being finalized on how to go about filing them, said Shea, also a partner and chair of Covington’s Employee Benefits and Executive Compensation practice.
Employers also need to evaluate whether filing the protective claims for their portion of the FICA tax is worthwhile, depending on how many affected employees and how much money are involved, said Shea. A part of that consideration is that not many states recognized same-sex marriages in 2009, so the number of employees eligible for refunds might be even smaller, Shea said. The process is not difficult, and ‘‘you don’t have to have very much money involved to make it worthwhile to do it,’’ he added.
There may be additional administrative changes that employers may want to make for the future, should DOMA be struck down, Newman said. Many employers’ payroll systems have been set up to make same-sex married partners’ benefits taxable, so they would need to change the system to no longer tax items such as health care coverage, he said.
This raises the issue of whether employers have adequate data to make these changes for employees who would be affected by DOMA being overturned, Newman said. ‘‘They may want to consider whether to gather that data,’’ he added.
Reproduced with permission from Daily Tax Report, 68 DTR G-5 (Apr. 9, 2013). Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>