The IRS is giving some business entities more time to apply for a tax refund involving severance pay.
Alert: The IRS says it will sign Form 907, Agreement to Extend the Time to Bring Suit, for certain taxpayers who had a FICA tax refund claim disallowed based on a controversial 6th Circuit court ruling. (U.S. v. Quality Stores, Inc., CA-6, 9/7/12)
Here’s the whole story: Generally, wages subject to income tax withholding are also treated as wages for federal payroll tax purposes. However, Supplemental Unemployment(SUB) are excluded from the definition of “wages” for this purpose. To qualify as SUB, payment must be:
- Made to an employee
- Pursuant to your company’s plan
- Due to an employee’s involuntary separation from employment
- As a direct result of a reduction in force, discontinuance of a plant or operation, or similar conditions
- Included in the employee’s gross income.
Because severance payments are clearly wages for federal income tax purposes, the IRS has consistently maintained that severance payments to terminated workers are subject to federal payroll taxes. Some courts have agreed with the IRS, but the 6th Circuit went the other way in the Quality Stores decision.
The IRS recently asked the U.S. Supreme Court to review the 6th Circuit’s ruling. In the meantime, it has suspended action on administrative refund claims within the jurisdiction.
Tip: Until the Supreme Court decides to review the case or not, the IRS now says it will sign Form 907 to extend the filing period to recover FICA taxes if the two-year deadline is approaching.