April 05, 2010
Payroll Tax Refund Alert Tax Refunds Immediate Action Required
By Diane Giordano, Partner, Tax & Business
A recent Federal District Court decision, U.S. v Quality Stores, Inc., (DC MI) 105AFTR 2d 2010, lends significant support to claims that have been filed, and claims that should be filed, for Federal Insurance Contribution Act (FICA) tax refunds relating to downsizing payments, severance payments, and non-traditional supplemental employee compensation plan benefits. The District Court aptly framed the sole issue in the case as a straight-forward, but legally-confounding question: whether severance payments qualify as "wages" subject to FICA taxation.
Numerous cases, revenue rulings, and commentators have reached different decisions on this important question. The District Court found the "decoupling language" in IRC Section 3121(a) required them to conclude that even if a payment is deemed to be wages, it might not be subject to FICA taxes. Therefore, they held that even though payments for severance were made in connection with employment, they were not paid as wages for services. As a consequence, these payments do not constitute wages for FICA tax purposes.
The many instances of corporate downsizing and employment force reductions suggests that significant FICA reimbursements should be available to taxpayers ON severance payments made to terminated employees.
The Quality Stores decision is a serious setback for the Internal Revenue Service and will likely be appealed to the U.S. Circuit Court of Appeals for the Sixth Circuit. Employers who made substantial termination or severance payments to involuntarily separated employees since January 1, 2006 should act promptly to protect their FICA tax refund rights. Protective refund claims should be filed for each quarter in which such wages were paid. Because of the conflicts between case law and IRS policies, refunds will probably not be forthcoming until such time as Quality Stores is resolved and accepted by the IRS, or until the Service takes a more pro-taxpayer friendly position or Congress intervenes.
Protective Claims utilizing Form 941-X should be filed for all open tax periods. A separate form must be filed for each quarterly Federal tax return period still open under the statute of limitations. For payroll tax purposes, the statute of limitations remains open three (3) tax years. However, all Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date. Under this special rule all Form 941’s filed on account of the 2006 tax year are deemed filed on April 15, 2007. Therefore, today all 2006, 2007, 2008 and 2009 years remain open for payroll tax purposes.
IMMEDIATE STEPS MUST BE TAKEN TO ACCUMULATE ALL REQUIRED FICA TAX PAID INFORMATION WITH RESPECT TO TERMINATED EMPLOYEES FOR THE 2006 TAX YEAR. CLAIMS MUST BE FILED ON FORM 941-X FOR EACH APPLICABLE QUARTER IN 2006, ON OR BEFORE THE STATUTE OF LIMITATIONS EXPIRES, APRIL 15, 2010.
Any delay in filing a Protective Claim for the 2006 tax year beyond Thursday, April 15, 2010 terminates the possibility of securing refunds of FICA tax paid. We urge all employers to protect their rights and preserve their refund claims by timely filing all required Protective Claims.