How Can Employers in Ohio, Kentucky, Michigan & Tennessee Get a FICA Tax Refund?

Christopher Axene | October 18th, 2012

Downsizing by companies has been a fact of life over the past several years.  As a part of this process companies may have paid severance payments to employees who were involuntarily terminated due to either: (1) reduction in force (“RIF”) initiatives or (2) plant closings or other similar conditions.

Historically the IRS has argued that such payments are subject to FICA tax withholding in addition to income tax withholding at the time of payment.  In 2002, the Court of Federal Claims in CSX Corp v. U.S. held that severance payments made by CSX were not subject to FICA tax and thus CSX was entitled to refunds of amounts previously withheld.   The IRS appealed and in 2008 the Court of Appeals for the Federal Circuit reversed the Court of Claims holding that such payments were subject to FICA tax.

Meanwhile a similar case was brought by Quality Stores as a part of their bankruptcy proceeding.  The company filed the action with the court when the IRS denied their FICA refund claim (filed based on initial outcome in CSX case).  The result was ultimately appealed by the IRS to the Sixth Circuit Court of Appeals which issued its ruling on September 7, 2012 in favor of Quality Stores.

The issue is a result of an ambiguity in the statute regarding whether or not supplemental unemployment compensation benefits (“SUB” payments) are subject to FICA tax withholding.

Under the statute, SUB payments are defined as: “amounts which are paid to an employee, pursuant to a plan to which the employer is a party, because of an employee’s involuntary separation from employment, resulting directly from a reduction in force, the discontinuance of a plant or operation or other similar conditions.”

Given the large dollars at stake, it is very likely that the IRS will appeal this decision to the U.S. Supreme Court.  Because there is now a split at the courts of appeal level, it is likely Supreme Court will agree to hear the case in order to resolve the split and judicially resolve the ambiguity once and for all.

In the meantime, employers who reside within the Sixth Circuit have an opportunity to file protective refund claims for FICA taxes previously paid on severance payments meeting the above definition.  Any refund claim must be filed prior to the expiration of the statute of limitations for that year.  The statute of limitations for the 2009 payroll tax year will close on April 15, 2013.

Ohio FICA Tax Refund

Are you a business owner in Ohio, Kentucky, Michigan or Tennessee?  Could a tax refund put some much needed cash back in your business?  Contact Rea & Associates.  Our Ohio tax services team can help you apply for a FICA tax refund to get back the cash you deserve.  But, remember to act quickly.  Wait until after April 15, 2013 and you have missed out on this great opportunity.

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