Refund claims of employment taxes paid on severance payments

Employment taxes paid on severance payments

The IRS today released an advance version of Announcement 2015-08 concerning application of a U.S. Supreme Court decision to taxpayer claims for refunds of employment taxes paid with respect to severance payments.

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Announcement 2015-08 [PDF 33 KB] provides that supplemental unemployment compensation benefits that do not satisfy the requirements for a narrow exclusion from FICA tax, as previously provided in Rev. Rul. 90-72—i.e., supplemental unemployment compensation benefits that are linked to the receipt of state unemployment compensation and satisfy certain other requirements—are not excludable from wages for FICA, FUTA, and income tax withholding purposes.

This treatment will also apply for taxpayers located within the jurisdiction of the Sixth Circuit.

Background

The U.S. Supreme Court in March 2014 unanimously held (8 to 0) that severance payments made to employees who are terminated against their will are taxable wages and are subject to certain withholding taxes, including FICA taxes. United States v. Quality Stores, Inc., 134. S. Ct. 1395 (2014)

The Supreme Court reversed a decision of the Sixth Circuit, holding that the severance payments were taxable wages for FICA purposes.

In today’s announcement, the IRS reported that in the years leading up to the Supreme Court’s decision, it had received claims for refund of FICA, FUTA, and RRTA taxes paid with respect to severance payments from over 3,000 taxpayers. The IRS disallowed refund claims filed by taxpayers located outside the jurisdiction of the Sixth Circuit, but eventually suspended administrative appeals with respect to these claims as well as refund claims filed by taxpayers located within the jurisdiction of the Sixth Circuit.

Announcement 2015-08

Announcement 2015-08 states that Rev. Rul. 90-72 continues to apply. As such, the IRS set forth three rules for applying the decision in Quality Stores:

  • Claims for refund of FICA, RRTA, or FUTA taxes paid with respect to severance payments that do not satisfy Rev. Rul. 90-72 - The IRS will disallow all claims for refund of FICA or RRTA taxes paid with respect to severance payments that do not satisfy the narrow exclusion contained in Rev. Rul. 90-72.

This treatment includes all claims for refund that were held in suspense pending the resolution of Quality Stores as well as claims filed by taxpayers located within the Sixth Circuit’s jurisdiction.

  • Appeal requests relating to disallowed claims for refund of FICA, RRTA, or FUTA taxes -The IRS will take no further action on the appeal requests that were suspended pending the resolution of Quality Stores.
  • Appeal requests relating to other issues - If a taxpayer’s claim for refund includes 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 Rev. Rul. 90-72, specific contact information is provided, to be used by the taxpayer to notify the IRS.

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