Filing a Protective Tax Refund Claim Could Reduce Same-Sex Couples' Federal Tax Liability

There are a lot of changes happening in the legal world which may affect the rights - and tax liability - of same-sex couples. The DOMA and Prop 8 cases argued at the United States Supreme Court this week have been all over the news. And while equality may still seem distant (some days more than others), and there are certainly a lot of changes to be made and work to be done, there is something you can do now to help improve your financial equality with respect to the IRS.

As of 2003, 1,138 federal statutory provisions in the U.S. Code include marital status as a factor in determining or receiving benefits, rights, or privileges. 198 of these provisions are federal taxation provisions.

If you are in a same-sex relationship in California and are married or in a registered domestic partnership, you and your spouse or partner should consider filing a protective tax refund claim with the IRS. If you would have been entitled to pay less federal tax had your relationship been recognized by the federal government during the past three years, filing a protective tax refund claim may benefit you. Filing such a claim now preserves any right you might have to a refund for the past three tax years. For example, filing a protective tax refund claim in 2013 could potentially preserve your right to a refund in 2010, 2011, and 2012.

Your protective tax refund claim will be based on the potential changes in federal law which may occur in the next few years, due to the growing number of legal challenges which have been filed against the federal Defense of Marriage Act (DOMA) in courts all around the United States. DOMA has been ruled unconstitutional by several courts during the past few years, and a few of these cases have now made their way to the Supreme Court of the United States. If the Supreme Court rules DOMA unconstitutional - or if Congress changes the law - the federal government (including the IRS) should finally recognize same-sex marriages and registered domestic partnerships. Such recognition would have far-reaching consequences, including many potential changes in tax liability.

There are many important areas of the law which would be affected by such a change. Filing a protective tax refund claim with the IRS would address some of the federal tax inequalities during the past three years, including same-sex couples’ ineligibility for tax exemptions such as: gifts between spouses during life (gift tax); gifts between spouses after death (estate tax); joint charitable tax contributions; and others. If you are acting as the personal representative for the estate of a deceased person, you should consider whether it would benefit the estate to file a protective tax refund claim on behalf of the estate.

Filing a protective tax refund claim now, rather than waiting, ensures that your rights will be preserved going back as many years as possible. Since filing a claim only preserves your rights for the past three years, waiting to file a claim could result in the loss of the right to a refund for past years.  Returns filed before the due date are deemed to have been filed on the due date, so if your tax year is a normal calendar tax year, you can generally make the calculation based on the due date of April 15 each year.

The IRS will not act on your claim until the contingency is resolved. In this case that means that the IRS will not act until the legality of DOMA is resolved. Such resolution could come as early as this year, but we may have to wait several years - we won’t know for sure until the law is actually changed. Some practitioners believe there is a chance that the IRS may enact a special rule allowing taxpayers to amend past returns more than three years old without requiring a protective tax refund claim. However, this is a remote possibility, and should not be relied upon.

If you think that filing a protective tax refund claim could benefit you and your spouse or partner, please contact me for more information.