Business Advisory Services Blog

Collecting Refunds of FICA for Payments made to Medical Residents Prior to April 1, 2005


Great news was recently received by university medical institutions with pending claims for a refund of FICA taxes remitted on amounts of compensation paid to medical residents. The Internal Revenue Service made an administrative determination to concede that amounts paid to medical residents for  taxable periods ending before April 1, 2005, are exempt from FICA taxes under the student exception.

Unfortunately, the refund opportunity does not apply to any payments made after the Treasury’s final regulations went into effect on April 1, 2005. These regulations were contested but, in June 2009, they were upheld by the United States Court of Appeals for the Eighth Circuit. See Mayo Foundation for Medical Education & Research v. United States, 568 F.3d 675 (8th Cir. 2009). The court of appeals decision reversed two separate decisions by a federal district court in Minnesota involving medical residents of the Mayo Foundation for Medical Education and Research as well as the University of Minnesota.

The refund opportunity also does not apply to taxpayers that did not timely file claims for refund of the taxes. The normal three-year statute of limitations applies to such claims.

The Service has said that it will begin contacting hospitals, universities, and medical residents who filed FICA refund claims for these periods with more information and procedures within 90 days and stated that employers and those with pending claims do not have to take any action at this time. However, once they are notified, employers are expected to have a limited time to perfect their claims, many of which were filed as protective claims showing one dollar of refund due.

What Should Organizations be Doing Now?

Those organizations that filed protective claims for refunds for periods ending before April 1, 2005, should start the process of gathering the information that will be needed to perfect or verify their refund claims before ultimate processing by the Service:

  1. Review the type of claim previously filed, i.e., protective or actual.
  2. Quantify the total amounts paid to medical residents that qualify for the exclusion from FICA wages.
  3. Identify each recipient of the payments in order to build a contact list that will be used to obtain the required consents regarding employees’ share of FICA.
  4. Compare the list to alumni records, professional data banks, etc., for current mailing addresses.
  5. Develop a plan to find missing individuals who received payments.
  6. Begin seeking consents from affected wage earners with respect to their share of FICA taxes.
  7. Identify resources within the organization or externally to timely complete this process.

For more information, post a comment below or contact our Healthcare Consulting Group at 440-449-6800

Information Courtesy: BDO

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