Posted tagged ‘FICA taxes’

Quality Stores Day Of Reckoning Draws Near – What Should Employers Be Thinking About?

January 16, 2014

By Phil Karter

The Quality Stores employment tax refund case was argued before the Supreme Court on January 14, 2014.  An explanation about the issue at stake can be found in prior Taxblawg.net postings.  Although the outcome of the case remains in doubt, the possibility of a taxpayer victory means that employers should start thinking about the need to satisfy an important prerequisite to qualify their claims for refund.

Employment (FICA) taxes have both an employer and an employee component. A taxpayer victory in Quality Stores will enable both employers and terminated employees to recover their respective shares of FICA taxes withheld from the employees’ severance pay.  The obvious question that is likely to arise from an employer’s standpoint is “what incentive do I have to file on behalf of former employees?”

The answer can be found in Treasury Regulation § 31.6402(a)-2(a)(1)(ii), which stipulates that the employer will not be allowed a refund or credit for the employer’s share of withheld taxes “unless the employer has first repaid or reimbursed its employee or has secured the employee’s consent to the allowance of the claim for refund and includes a claim for the refund of such employee tax.”  In other words, merely notifying ex-employees of their rights to claim refunds themselves is inadequate to perfect the employer’s claim to recover its own share of withheld employment taxes. The employer must take affirmative steps on behalf of the terminated employee.

Thankfully, despite the above language about securing consents, the regulation elaborates that the requirement “does not apply to the extent that the taxes were not withheld from the employee or, after the employer makes reasonable efforts to repay or reimburse the employee or secure the employee’s consent, the employer cannot locate the employee or the employee will not provide consent.  Therefore, it is the attempt to secure consents that counts rather than the actual ability to secure such consents. (This same consent procedure also applies to employment tax refund claims arising from the Supreme Court’s ruling in United States v. Windsor, wherein the court struck down the Defense of Marriage Act (DOMA) as unconstitutional.  Prior to that decision, employers were required to withhold and pay over employment taxes for benefits provided to same-sex spouses of employees.)

Up to this point, a majority of employers that have filed protective refund claims have likely not undertaken the effort to obtain employee consents. There are at least two practical reasons for this.  First, the Sixth Circuit’s 2012 favorable decision in Quality Stores came out only about six months before the expiration of the 2009 statute of limitations (assuming the employer’s return was filed without extension). Thus, for employers eligible for refunds of FICA withholding paid over in that year, there wasn’t a good deal of time to accomplish this task.  Without a full solicitation of consents and tabulation of the refunds owed to employees who had responded affirmatively, there would have been no way to calculate the aggregate employee refund and include it on a refund claim.

Additionally, with the final outcome of Quality Stores, and the consequent entitlement to FICA refunds in doubt, it would have been hard for employers to justify the expense of undertaking the consent process when it wasn’t clear the exercise would be worthwhile when all was said and done.

Assuming the Supreme Court affirms Quality Stores, the simple solution for employers that filed protective claims covering only their share of FICA withholding is to file amended claims to add the aggregate employees’ share for those employees who provide their consents.  The procedure for this is set forth right in the instructions for Form 941-X on which the refund claim is made.  The instructions provide, in pertinent part, as follows:

5b.     . . . In certain situations, you may not have repaid or reimbursed your employees or obtained their consents prior to filing a claim, such as in cases where the period of limitations on credit or refund is about to expire. In those situations, file Form 941-X, but do not check a box on line 5. Tell us on line 25 that you have not repaid or reimbursed employees or obtained consents. However, you must certify that you have repaid or reimbursed your employees or obtained consents before the IRS can grant the claim.

 5c.     Check the box on line 5c to certify that your overreported tax is only for the employer share of social security and Medicare taxes. Affected employees did not give you consent to file a claim for refund for the employee share of social security and Medicare taxes, they could not be found, or would not (or could not) give you a statement described on line 5b.

 5d.     Check the box on line 5d to certify that your overreported amount is only for federal income tax, social security tax, Medicare tax, or Additional Medicare Tax that you did not withhold from your employees.

The Form 941-X instructions also provide a sample consent that can be used as a template by employers:

Employee name ____________________

Employer name  ____________________

I give my consent to have my employer (named above) file a claim on my behalf with the IRS requesting $_________ in overcollected social security and Medicare taxes for 20___. I have not claimed a refund of or credit for the overcollected taxes from the IRS, or if I did, that claim has been rejected; and I will not claim a refund or a credit of the amount.

 Employee signature _____________________

Date _________________

The consents are not sent to the IRS but retained by the employer. However, employers should be mindful not only to retain such consents, but also to adequately document their efforts to obtain consents for all qualifying employees, whether or not they are returned.

On a going-forward basis until Quality Stores is decided, employers can ease the burden of having to track down former employees and send out consent forms to qualify their own refund claims by incorporating a consent form along the lines of the template shown above into the paperwork typically involved in the termination process.  Of course, if Quality Stores is decided favorably, employers from that point forward will no longer be obliged to withhold, obviating the need to continue this practice.

Supreme Court Accepts Certiorari In Quality Stores

October 1, 2013

By Phil Karter

The U.S. Supreme Court today accepted the government’s petition for certiorari in  United States v. Quality Stores (Civil No. 10-1563, 6th Cir. 2012), a case in which the Sixth Circuit affirmed a lower court’s decision that supplemental unemployment compensation benefit (SUB) payments are not taxable as wages and are consequently exempt from FICA taxes.  In accepting the case for consideration, the Supreme Court is expected to resolve a conflict between the Sixth Circuit and the Federal Circuit, which decided a prior case,  CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), in favor of the government.

The case is of considerable interest to thousands of taxpayers, at least 2,400 of whom have filed administrative refund claims according to government estimates.  More than a billion dollars in potential tax refunds is riding on the ultimate outcome of this issue.   Quality Stores will be decided by eight justices, as Justice Elena Kagan is taking no part in the case.

For past coverage on this issue, please click here.

Squib Note: The Opera Isn’t Over Yet on FICA Tax Refunds Until The Supreme Court Sings

April 3, 2013

By Phil Karter and John Hackney

In a blog posting earlier this year, we talked about the Sixth Circuit’s decision in United States v. Quality Stores (Civil No. 10-1563, 6th Cir. 2012) affirming a lower court’s decision that supplemental unemployment compensation benefit (SUB) payments are not taxable as wages and are consequently exempt from FICA taxes. The Sixth Circuit’s decision in Quality Stores directly conflicts with the Federal Circuit’s prior decision in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), which held that such payments were subject to FICA.  For many employers who have filed protective refund claims, the favorable resolution of this conflict could result in meaningful refunds.

Those speculating on whether Quality Stores will be appealed to the Supreme Court, and whether the Supreme Court will grant certiorari, will have to wait a little longer to find out.  The original deadline for filing a petition for certiorari has been extended from April 4th to May 3, 2013.

Although the deadline for the government’s petition has been extended, the April 15, 2013 deadline to file protective refund claims for 2009 (the oldest eligible year) has not.  For employers that haven’t already done so, particularly those located within the Sixth Circuit (Kentucky, Michigan, Ohio and Tennessee), there is still a small amount of time left.

A final word of caution about deadlines:  If a protective FICA tax refund claim is denied, employers have two years from the date of denial to file a tax refund suit or obtain an extension of the two-year period by filing a Form 907.   Given the uncertainty over the final outcome of this issue, it is unclear whether the IRS will summarily deny protective refund claims or wait until the dust settles.  Nonetheless, employers whose refund claims are denied are well advised to keep track of the two-year deadline.  If the Supreme Court accepts certiorari, it may take that long before the final word on the subject is written.

Sixth Circuit Moves The Ball Forward For Companies Seeking FICA Tax Refunds On Supplemental Unemployment Compensation Benefit Payments

January 8, 2013

By Phil Karter and John Hackney

For companies that have implemented employee layoffs in the past several years and made severance payments to terminated employees, the prospect of eligibility for federal tax refunds for any FICA taxes withheld from such payments took another step forward with the Sixth Circuit’s January 4th denial of the government’s petition for rehearing en banc in United States v. Quality Stores (Civil No. 10-1563, 6th Cir. 2012).

The rehearing petition was filed after a government loss in September of last year in which the appellate court affirmed a lower court’s decision that supplemental unemployment compensation benefit (SUB) payments are not taxable as wages and are consequently exempt from FICA taxes. Under section 3402(o)(2) of the Internal Revenue Code, 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 (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions.”

The Sixth Circuit’s decision in Quality Stores directly conflicts with the Federal Circuit’s prior decision in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008), which held that such payments were subject to FICA.  With the denial of the petition for rehearing in Quality Stores, the stage is now set for the government to seek Supreme Court review.  Because the eventual outcome of this conflict has enormous financial implications, a petition for certiorari is reasonably foreseeable.  Such a petition would be due by April 4, 2013.

Although the final word on the issue may not yet be written, for companies located within the Sixth Circuit’s purview (Kentucky, Michigan, Ohio and Tennessee), the taxpayer-friendly Quality Stores decision is currently binding authority which, unless reversed by the Supreme Court, will entitle those who have filed timely refund claims to the refund of FICA taxes paid over on SUB payments. In the rest of the country, Quality Stores is not binding on the IRS.  Nonetheless, the case at least raises the prospect of a taxpayer victory on the issue when the dust finally settles.

Many companies have already filed protective tax refund claims to preserve their rights to receive potentially significant refunds of FICA tax.  For those that haven’t, filing such claims for each open taxable year in which FICA was withheld on SUB payments is an absolute prerequisite to obtain any refunds. There is little cost associated with filing a protective refund claim but the potential benefit could be quite large.  Accordingly, any eligible employers who have not already done so are advised to file their claims as soon as possible for all open years to avoid being barred by the applicable statute of limitations, which typically remains open for the later of three years after the return due date or two years after the date of payment.

A final point about which employers filing refund claims should take note is that under Treas. Reg. § 31.6402(a)-2, a refund claim seeking the refund or credit of an employee’s share of FICA taxes requires the employer to certify either that it has repaid or reimbursed the tax to its employee or that it has secured the employee’s written consent to the filing of the refund claim (except to the extent the taxes were not withheld from the employee).  In Quality Stores, for example, roughly 1,800 of 3,000 former employees consented to the company filing FICA tax refund claims on their behalf.  Consequently, the employer’s refund claim for its own share of FICA taxes exceeded the refund sought for its former employees’ share.


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