The ongoing, multi-year saga of refund claims to the Internal Revenue Service (IRS) for Federal Insurance Contribution Act (FICA) taxes paid on medical resident stipends continues without resolution. Institutions that wish to file refund claims for FICA taxes paid in calendar year 2001 need to file such claims by April 15, 2005 to fall within the statute of limitations for such claims. As this deadline for another filing year approaches, we would like to provide you with a brief update on the developments of this past year.
Under federal tax rules, employers must withhold FICA taxes from wages paid to employees and pay an equivalent employer tax. However, the Internal Revenue Code provides that services performed by students are exempt from "employment" for this purpose and, therefore, amounts paid to them are not subject to FICA tax. In 1998, the United States Court of Appeals for the Eighth Circuit determined in Minnesota v. Apfel that medical residents in the University of Minnesota graduate medical program were "students" for this purpose and FICA was not due on their stipends.
Following this decision, many institutions filed refund claims with the IRS requesting refunds of FICA taxes paid in previous years. A refund claim encompasses both FICA taxes that were withheld from medical residents’ payments as well as the employer’s portion of FICA taxes paid by the institution. If the institution decides to litigate the claim, or this issue is resolved in the future in a way permitting payment of the claim, the institution must attempt to obtain consent from the individuals for the institution to seek refunds of the withheld portions on the individuals’ behalf. However, obtaining consent is not required before filing a refund claim.
Although many of the claims were initially granted, most of the recent medical resident FICA refund claims submitted have been held in suspense by the IRS and have neither been paid nor denied. In some cases, the IRS has sought to recover refunds from institutions that they have already paid. In one such case, United States v. Mayo Foundation for Medical Education and Research, decided in August 2003, a Minnesota district court determined that the institution was entitled to the refund.
Since McDermott last published comment on this subject (http://www.mwe.com/info/news/ots0404a.htm), several events have occurred that have brought no further resolution to this issue.
First, the IRS has issued final regulations, which are now effective, that are similar to the regulations proposed in early 2004. For tax purposes, an individual is not considered a student if the individual regularly performs services for more than 40 hours per week, if the individual is licensed and if the individual receives certain types of employee benefits. If an individual does not fit these criteria, then the regulations indicate that a medical resident can qualify for student status.
Second, a Florida district court granted summary judgment to the government in another erroneous refund case, United States v. Mount Sinai Medical Center of Florida. The decision concluded that medical residents are subject to FICA taxes as a matter of law and indicated that the Mayo case was wrongly decided. That decision has been appealed.
Finally, while the IRS has issued various pronouncements on this subject over the last few years and has indicated that it is preparing a settlement initiative on this issue, no formal settlement initiative has been finalized. However, the IRS has initiated a fast track appeals process for selected institutions for the purpose of developing a settlement approach. McDermott is handling one of these three test cases and is representing institutions in several cases that have been filed in district courts or are on appeal.