The hotly contested severance compensation, tax dispute has been resolved and it’s a victory for the government. The nations’ highest court has spoken: Severance pay is subject to FICA tax.
Many tax attorneys filed protective claims for refunds to ensure that their client’s refunds would be timely. Generally, a tax refund must be claimed the latter of three years from the due date of a return or 2 years from the time the tax was paid. A protective claim for refund stops the statute from running.
In US vs. Quality Stores Inc., the Supreme Court unanimously held that laid off workers’ severance payments would be subject to FICA taxes (Social Security and Medicare taxes). Quality Stores Inc. had closed its stores in early 2000. Upon its closure, it fired 3,100 workers and filed Chapter 11 bankruptcy. While in bankruptcy, Quality Stores asked the bankruptcy judge to order the IRS to refund FICA taxes paid on severance pay. The Sixth Circuit ruled that severance pay was not subject to FICA and ordered the IRS to pay a tax refund to Quality Stores. The US Supreme Court overturned the lower court decision. The decision saved the government more than $1 billion in refund claims.