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Deadline approaches for protective refund claims for FICA tax on severance pay

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Hands and calculatorThe April 15 deadline approaches for taxpayers to preserve their ability to claim potential refunds of Federal Insurance Contributions Act (FICA) taxes on 2010 severance pay. The U.S. Supreme Court heard oral arguments in United States v. Quality Stores, Inc. (No. 12-1408) in January and is expected to rule on whether FICA tax applies to a type of severance pay known as supplemental unemployment benefit (SUB) payments by July. A favorable decision would allow businesses nationwide to obtain FICA tax refunds on SUB payments for any open years.

Taxpayers should preserve their ability to obtain refunds for open years by filing protective claims for 2010 and extending the window for filing suit on any earlier protective claims that were denied. Currently, the 2010, 2011, 2012 and 2013 calendar years are open, but 2010 will close on April 15, 2014. Taxpayers should not need to file protective claims for 2011, 2012 or 2013 before the Supreme Court rules, since the Court is expected to rule before the statute of limitations closes for these years.

Background
FICA generally subjects all wages (with certain limited exclusions) to matching employer and employee contributions for Social Security and Medicare taxes. The IRS has long argued that severance payments made at separation from service are wages for FICA tax purposes, and the Federal Circuit agreed with the IRS in CSX Corp. v. United States (518 F.3d 1328) in 2008. But the Sixth Circuit ruled in Quality Stores in 2012 that SUB payments as defined under Section 3402(o) are not subject to FICA, a decision that set up a circuit split. SUB payments are generally defined as amounts paid to an employee because of an involuntary separation from employment resulting from a reduction in work force, the discontinuation of a plant or operation, or other similar conditions.

Section 3402(o) states that SUB payments should be treated “as if they were wages” for income tax withholding purposes. The taxpayer in Quality Stores is arguing that the rule implies that SUB payments are not actually wages and that there is no corresponding rule to treat them as if they were wages for FICA tax purposes.

The Supreme Court is now expected to rule definitively on whether severance payments for involuntary separation from employment resulting from a reduction in work force, the discontinuation of a plant or operation, or other similar conditions, are subject to FICA taxes.

Next steps
Taxpayers who have not yet filed protective claims should do so, and taxpayers whose protective claims have been denied should preserve their ability to file suit. The IRS denied many protective claims outside of the Sixth Circuit by arguing that CSX was settled law. Taxpayers generally have two years from the date of receipt of an IRS notice of disallowance to file suit in federal court to overturn the IRS’s decision, but they can file Form 907 to extend this deadline. The IRS must accept and sign the Form 907, and the agency has generally been accepting two-year extensions.

Filing protective claims
FICA protective refund claims may be filed without notifying the affected employees. In contrast, to file an actual refund claim (rather than a protective claim) for the employer’s share of FICA tax, the employer must first make a reasonable attempt to notify the affected employees of the availability of the refund and offer to file a refund claim on behalf of the employees for the employee share of FICA tax.

To file a refund claim on behalf of an employee, the employee must provide the employer with a written statement certifying that the employee will not file a refund claim directly with the IRS and also provide written consent for the employer to file the refund claim on the employee’s behalf. If employees cannot be located and/or do not provide their written consent, the employer may file a refund claim for just the employer’s share of FICA tax.

To ultimately file an actual refund claim, employee wage information must be preserved. Employers should take steps now to maintain and preserve wage information necessary to file actual refund claims in case the Supreme Court rules in favor of the taxpayer in Quality Stores.

Contacts

Adam Lambert212.542.9639
adam.lambert@us.gt.com

Mark Ritter
404.704.0114
mark.ritter@us.gt.com

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