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Court allows employer tax refunds on layoffs

Tuesday, October 30th, 2012

The Sixth District Court of Appeals, which includes Tennessee, has upheld lower court rulings that severance pay is not subject to FICA tax. Companies that had mass layoffs and offered severance pay packages should consider filing claims to refund those taxes before the statute of limitations runs and limits the opportunity.

In March 2008, the Federal Circuit Court ruled in the CSX Corp. case that the tax is owed. However, of the five federal trial and appellate courts that have looked at the issue, four have ruled in favor of taxpayers. The latest case in the Sixth Circuit, Quality Stores (a brief history), keeps the question unsettled, and it is likely to work its way to the Supreme Court in the next few years. The IRS issued a Revenue Ruling in 1990 clarifying its position for payment of the tax, and it is not likely to capitulate with several billion dollars at stake.

Employers with large numbers of layoffs may consider litigation to recover FICA tax paid on severance pay. Others may consider filing protective claims for refund using IRS procedures. Either way, deadlines for doing so are rolling by every quarter, generally three years after the filing deadline for reporting the tax.

Employees also have a stake in this decision, because they too pay FICA tax through withholding. Quality Stores, with the consent of many of its laid-off employees, filed on their behalf to recover those payments.

This is a complex matter with potentially large financial implications, so consult your tax adviser and attorney to weigh your options.

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