In United States v. Quality Stores, Inc., 134 S. Ct. 1395 (2014), the U.S. Supreme Court ruled that severance payments at issue in the case were wages subject to Federal Insurance Contributions Act (FICA) taxes. The Court’s ruling reversed a decision by the Sixth Circuit Court of Appeals that held that severance payments made by the taxpayer, Quality Stores, were not subject to FICA taxes.
In the years between the Sixth Circuit’s ruling and the Supreme Court’s ruling, the IRS received from taxpayers claims for refunds of FICA taxes, Railroad Retirement Tax Act (RRTA) taxes and Federal Unemployment Tax Act (FUTA) taxes paid related to severance payments. The IRS disallowed all claims for refunds outside the jurisdiction of the Sixth Circuit.
In Announcement 2015-8, the IRS announced it will disallow all claims for refunds of FICA, FUTA and RRTA taxes paid with respect to severance payments that don’t satisfy the narrow exclusion included in Rev. Rul. 90-72. Under Rev. Rul. 90-72, supplemental unemployment compensation benefits that are linked to the receipt of state unemployment compensation and satisfy certain other requirements can be excluded from FICA, FUTA and income tax withholding.