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IRS to Pay Medical Resident FICA Refund Claims for Tax Periods Ending Before April 1, 2005

The Internal Revenue Service (IRS) has begun notifying teaching hospitals that it has completed its review of their medical resident FICA refund claims for tax periods ending before April 1, 2005.  Many hospitals have been waiting for this since the March 2010 announcement the IRS would allow medical resident FICA refund claims for tax periods ending before April 1, 2005.  The first of these hospitals to be contacted should receive IRS FICA refund checks as early as May 2012.

The Internal Revenue Service (IRS) has finally begun to notify teaching hospitals that it has completed its review of their timely filed medical resident FICA refund claims for tax periods ending before April 1, 2005.  Many hospitals have been waiting for this final chapter in the medical resident FICA refund claim saga since the announcement in March 2010 that the IRS would allow medical resident FICA refund claims for tax periods ending before April 1, 2005.  The first of these hospitals to be contacted should commence receiving IRS FICA refund checks as early as May 2012.

Background

The IRS is using a form letter (Letter 4878) that provides a narrative description of a hospital’s obligation upon receipt of the FICA tax refund, as well as an explanation of the claims allowed or disallowed.  In some cases, the IRS is disallowing FICA refund claims with respect to selected employment tax quarters, or selected employees/medical residents. 

In other cases the IRS may be correctly disallowing FICA refund claims for certain employment tax quarters, because the teaching hospital had previously requested a credit adjustment, rather than a refund, in connection with wages paid to medical residents.  In these cases, the hospital should have already repaid the affected employees their share of FICA taxes and received the benefit of a credit offset against the hospital’s immediate FICA tax deposit obligations for both the employer’s and employee’s share of FICA taxes.

When to Expect to Receive Refunds and Expected Form of Payment

The IRS form letter advises a hospital that it should expect to receive its FICA refunds within eight to 12 weeks from the date of the letter.  The IRS also explains that the hospital will receive two separate refund checks for each employment tax quarter for which qualifying FICA claims are pending:

  • One refund check for the employee share of FICA tax with statutory interest paid at the higher statutory rate for individuals and non-corporate taxpayers (AFR short-term rate plus 3 percent (IRC §6621(a)(1))
  • One refund check for the employer share of FICA tax with applicable statutory interest, potentially calculated under the special IRS interest rules for corporations (that also applies to certain tax-exempt organizations), which is one point lower than the equalized non-corporate rate(see IRC §6621(a)(1)(B); IRS Internal Revenue Manual 20.2.4.9.)

Obligations and Potential Problems Related to Processing the Refunds

The hospital is required to file corrected Forms W-2 with the Social Security Administration (SSA), showing reduced wages for Social Security (Form W-2, Box 3) and Medicare tax (Form W-2, Box 5) purposes, respectively, for each calendar year for each employee who received a FICA refund.  Instructions for filing Forms W-2c with the SSA are provided as an attachment to the letter.

The IRS refund of the employee’s share of FICA tax and applicable interest will be provided as an aggregate payment for each quarter.  The hospital will be responsible for apportioning the refund of FICA tax and applicable interest among individual employees.  The hospital may not reduce the employee’s share of the FICA refund and statutory interest by any of the costs incurred by the hospital in order to obtain the refund.

The hospital should closely scrutinize the IRS interest calculations in connection with the FICA refund payments, because this settlement initiative presents the first time the IRS will be computing statutory interest at potentially different rates for the refund of the employer’s and employee’s share of FICA tax.  The IRS Service Center had to create a new interest computation methodology for this purpose.

The hospital is required to separately report interest payments of $600 or more to employees on Form 1099-INT, “Interest Income.”

It appears that, for some hospitals, the IRS is computing the statutory interest on the employer’s share of FICA refund payments using the higher non-corporate rate.  Even this 1 percent interest rate difference could mean millions of dollars, given the number of years at issue for the outstanding FICA refund claims of some hospitals.

Processing the FICA tax refunds imposed a heavy burden on the IRS.  An equally heavy burden is imposed on hospitals that receive the refunds.  Questions related to processing the refunds or the required SSA filings can be directed to author Ira Mirsky, an employment tax specialist. 

© 2020 McDermott Will & EmeryNational Law Review, Volume II, Number 126

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