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Accounting & Tax :: Severance Payments are not Subject to FICA Tax, Again!

In June 2010, the IRS announced it was not following the taxpayer friendly decision reached in Quality Stores Inc. and would continue to impose FICA taxes on certain employee severance payments. As a result of the Quality decision, many taxpayers filed protective claims for refunds for tax periods that were going to expire immediately after the District Court’s favorable decision.

Many of these claims had no response, while others have been summarily rejected.

The IRS may no longer be able to postpone recognizing the validity of the position that FICA tax does not apply to severance payments as it has again lost its argument in the Court of Appeals for the Sixth Circuit on September 7, 2012. This is a very powerful pro-taxpayer position that is now only appealable to the Supreme Court. Alternatively, the IRS can seek Congressional action on this matter.

While we do not yet know how the IRS will proceed regarding the Supreme Court action, taxpayers should continue to update their claims to insure that expiring tax periods do not restrict the amount of refunds to which they might ultimately be entitled.

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