American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
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The United States government has asked the U.S. Supreme Court to review Quality Stores, 2012-2 ustc ¶50,551, where the Sixth Circuit Court of Appeals found that supplemental unemployment benefits (SUB) payments are not wages for purposes of Federal Insurance Contributions Act (FICA) taxation. In the meantime, taxpayers whose refund claims based on Quality Stores have been denied by the IRS are filing Form 907, Agreement to Extend the Time to Bring Suit.
CCH asked the IRS to confirm recent reports that the agency is willing to sign Form 907 to obtain an extension of the time to file a refund suit for FICA refunds it has denied. "Until the Supreme Court decides whether to review the Quality Stores ruling, the IRS will sign a timely filed Form 907 to extend the time period to file a suit to recover the FICA taxes if the two-year limitations period for filing suit after a notice of IRS disallowance is approaching," an IRS spokesperson told CCH.
Comment. The statute of limitations for 2010 refund claims will expire on April 15, 2014, Adam Lambert, CPA, Managing Director, National Practice Leader - Employment Tax Services, Grant Thornton, LLP, New York, told CCH. "Employers should wait to file a protective claim because the IRS will deny it if the employer is not within the Sixth Circuit," Lambert said. Once the IRS denies the claim, the employer has two years to file a refund suit or Form 907. The delay of filing a claim delays in turn the start of the two-year period for filing a refund suit or Form 907, Lambert explained.
In Quality Stores, terminated employees received severance payments, which the employer reported as wages on Forms W-2 and withheld income tax and FICA taxes. The employer subsequently requested refunds of the FICA taxes. According to the employer, the payments were SUB payments exempt from FICA. A federal district court agreed. The IRS appealed to the Sixth Circuit, which also found in favor of the employer.
Supreme Court petition
On May 31, 2013, the U.S. Solicitor General filed a petition for certiorari requesting the Supreme Court to review Quality Stores. According to the government, the Sixth Circuit relied on what it perceived to be the negative implication of Code Sec. 3402(o), which mandates withholding of income tax from certain payments made to terminated employees. The Sixth Circuit inferred that, because Code Sec. 3402(o) states that any supplemental unemployment compensation benefit shall be treated as if it were a payment of wages for purposes of federal income tax withholding, such payments should not be treated as wages for purposes of FICA taxation, the government told the Supreme Court.
According to the government, the Sixth Circuit failed to recognize that the applicability of Code Sec. 3402(o) is limited to income tax withholding. This was a key factor in CSX, Corp., 2008-1 ustc ¶50,218, where the Court of Appeals for the Federal Circuit treated SUB payments as wages subject to FICA, the government told the Supreme Court.
A protective refund claim is a claim filed to protect a taxpayer's right to a potential refund based on a contingent event for a tax period for which the period of limitations is about to expire. Pending litigation is an example.
Comment. At least one other employer has filed suit in federal district court against the IRS for denying a protective claim and subsequently not acting on or approving a Form 907 filed by the employer, Lambert told CCH.
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