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July 23, 2014

April 15th Deadline for Filing FICA Refunds for Severance Pay

Severance pay due to an involuntary separation from employment resulting from a reduction in force, plant shutdown or similar condition may be exempt from FICA taxes.  As we reported in September 2012, the U.S. Court of Appeals for the Sixth Circuit found in Quality Stores that severance pay is not required to be tied to continued eligibility for unemployment benefits in order to be exempt from FICA.  (Click here for more details regarding the Quality Stores decision.) Shortly after this decision the Internal Revenue Service (IRS) requested that the Sixth Circuit reconsider its decision in an en banc review (i.e., a hearing before all judges on the circuit court).  Earlier this month, the Sixth Circuit denied this request. 

The Quality Stores decision creates a clear split with the U.S. Court of Appeals for the Federal Circuit.  In light of the Sixth Circuit’s denial, the IRS will likely file a writ of certiorari with the Supreme Court of the United States seeking a reversal of the Quality Stores decision.  For now, the IRS is refusing refund claims outside of the Sixth Circuit and taking no action with respect to refund claims within the Federal Circuit (states within the Sixth Circuit are Kentucky, Ohio, Michigan and Tennessee).  For now, employers should continue withholding FICA taxes on severance pay that is not tied to unemployment benefits. 

Employers that have made severance payments due to reductions in force, plant shutdowns or similar conditions should consider filing protective FICA tax refund claims.  Only a limited period of time is available to file.  In general, the statute of limitations for tax refund claims is three years.  As a result, April 15, 2013, is the due date for taxpayers for filing a refund claim with respect to the 2009 calendar year.  A refund claim cannot be filed with respect to severance payments made before 2009.

Filing a protective claim is relatively simple to do.  It is not necessary that the protective claim include exact calculations and employee consents for the refund filing.  This information and the required employee consents can be provided at a later time in a supplemental filing.  It is recommended that all employers file protective claims, particularly with respect to severance payments made to employees located in the Sixth Circuit.

If a FICA tax refund has been filed and the IRS has issued a notice of claim disallowance, the taxpayer must either (i) bring suit to contest the disallowance within two years after the issuance of this notice or (ii) obtain an extension of the time to file such a suit with the IRS—this process can be initiated by filing IRS Form 907, Agreement to Extend the Time to Bring Suit.

© 2014 McDermott Will & Emery

About the Author

Partner

Robin L. Greenhouse is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  Robin represents clients in resolving complex federal tax controversies with the IRS at audit or appeals, and in tax litigation in the U.S. Tax Court, the U.S. Court of Federal Claims and the U.S. District Courts.  She has litigated federal tax cases involving numerous issues, including:  foreign tax credits, allocation of expenses between domestic and foreign source income, section 1341 claim of right, calculation of interest,...

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About the Author

Partner

Andrew C. Liazos is a partner in the law firm of McDermott Will & Emery LLP based in the Firm’s Boston office. Andrew heads the Firm's Executive Compensation Group and the Boston Employee Benefits Practice.

Andrew regularly represents Fortune 500 companies, public companies, large closely held businesses and compensation committees on all aspects of executive compensation, ERISA fiduciary matters, employee benefits in business transactions and bankruptcy, and employee stock ownership plans. He also counsels executives in employment agreement and joint venture...

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Partner

Ruth Wimer, Esq., CPA, is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  She focuses her practice on matters related to executive compensation including international, fringe benefits, personal use of employer aircraft and qualified and non-qualified deferred compensation.

Ruth has extensive experience advising clients on structuring optimum ownership of business aircraft, factoring in deduction and income inclusion for personal use, excise tax, depreciation, ...

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