In response to a Supreme Court decision last year, the Internal Revenue Service issued an announcement Tuesday on how it would continue to disallow most claims for refunds of taxes on severance pay, with some exceptions.
Last March, the Supreme Court ruled in the case of U.S. v. Quality Stores Inc. that payments to laid-off workers are subject to Social Security and Medicare taxes (see Supreme Court Rules Severance Pay Can Be Taxed).
In response, the IRS issued Announcement 2015-8, addressing the application of the court ruling to claims for refund of employment taxes. The Supreme Court held last year in the Quality Stores case that the severance payments at issue were wages subject to tax under the Federal Insurance Contributions Act, or FICA. The ruling overturned an earlier decision by the U.S. Court of Appeals for the Sixth Circuit that held severance payments were not wages subject to FICA taxes.
In Tuesday’s announcement, the IRS noted that in the years leading up to the Supreme Court decision, the agency had received over 3,000 claims for refund of FICA, Railroad Retirement Tax Act (RRTA) and Federal Unemployment Tax Act (FUTA) taxes that had been paid out of worker’ severance packages. However, the IRS had disallowed all of the claims for refund from taxpayers who were located outside the jurisdiction of the Sixth Circuit, in accordance with an earlier Supreme Court decision in a 2008 case, CSX v. U.S.
Many taxpayers nonetheless submitted a request to appeal the disallowed claim for refund with the IRS’s Office of Appeals. However, the IRS also suspended action on those appeal requests pending the outcome of the Quality Stores case.
Under Revenue Ruling 90-72, supplemental unemployment compensation benefits that are linked to the receipt of state unemployment compensation and satisfy certain other requirements are excludable from wages for FICA, FUTA, and income tax withholding purposes, and are excludable from compensation for RRTA tax purposes. In the Quality Stores case, the parties agreed that the payments at issue did not satisfy the requirements for the narrow exclusion from FICA tax contained in Revenue Ruling 90-72.
Although the Supreme Court ruled unanimously that severance pay was subject to FICA taxes, the Supreme Court did not address whether the exclusion from FICA taxes in Revenue Ruling 90-72 for certain payments linked to state unemployment benefits is “consistent with the broad definition of wages under FICA.”
The IRS said Tuesday that it would continue to disallow all claims for refund of FICA or RRTA taxes that have been paid with respect to severance payments that do not satisfy the narrow exclusion contained in Revenue Ruling 90-72. This includes all claims for refund that were held in suspense pending the resolution of the Quality Stores litigation and claims filed by taxpayers located within the Sixth Circuit’s jurisdiction. Since the definition of wages contained in Section 3121(a) of the Tax Code is generally the same as the definition of wages in Section 3306(b) with respect to FUTA, the IRS said it would also continue to disallow claims for refund of FUTA taxes paid for severance payments.
The IRS said it also would not take further action on appeal requests that were suspended pending the resolution of the Quality Stores case. The IRS disallowed the claims for refund that are the subject of these appeal requests. Following the Supreme Court’s unanimous ruling that the severance payments at issue were wages for FICA purposes, the IRS contended that there is no basis for taxpayers to appeal the disallowance to the IRS Office of Appeals with respect to that issue.
However, if a taxpayer’s claim for refund for which an appeal was requested included an additional or different basis for the claim for refund (such as a claim for refund of FICA tax paid on certain fringe benefits) or concerned payments that satisfied the requirements of Revenue Ruling 90-72, the IRS said the taxpayer should contact Laird MacMillan at (651) 726 - 1473 for information regarding how to proceed with the appeal request for that portion of the disallowed claim.
If the taxpayer does not contact the IRS under those circumstances, the IRS said it would take no further action on the appeal request. In the disallowance letter sent to taxpayers who claimed a refund, the IRS pointed out that the two-year period during which a taxpayer can file suit in court began on the date that the disallowance letter was mailed by certified or registered mail, and the filing of an appeal request did not suspend that time period for filing suit.
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