IRS makes decision regarding FICA for medical residents
In March of 2010 the Internal Revenue Service (IRS) announced that it will accept the position that medical residents meet the student exception from FICA but only for tax periods ending before April 1, 2005. Importantly, for tax periods after April 1, 2005, the IRS will continue to take the position that medical residents are full-time employees under the regulations and therefore ineligible for the student FICA exemption. See below for Frequently Asked Questions on this topic.
Frequently Asked Questions:
1) May medical residents be entitled to FICA refund claims with the Internal Revenue Service (IRS)?
The Internal Revenue Code (IRC) Section 3121(b)(10) exempts from FICA taxation students who are enrolled in and regularly attending classes at a school, college, or university. Court cases in the 8th circuit (Michigan is in the 6th circuit) have held that medical residents may qualify as students entitled to this exception.
2) Does the IRS consider medical residents as students?
The IRS has traditionally concluded that medical residents do not meet the student exception from FICA. In fact, last year, the IRS had 16 docketed cases in various circuits denying medical residents this exception. The IRS had suspended processing any and all medical resident FICA refund claims. Please note that the federal government collected from medical residents each year FICA taxes in excess of a billion dollars a year.
3) Did the IRS recently change its position?
Yes, in part. This March, the Internal Revenue Service (IRS) announced that it will accept the position that medical residents meet this student exception but only for tax periods ending before April 1, 2005. Importantly, for tax periods after April 1, 2005, the IRS will continue to take the position that medical residents are full-time employees under the regulations and therefore ineligible for the student FICA exemption.
4) What is the significance of April 1, 2005?
On April 1, 2005, the new regulations regarding the student FICA exception became effective. One part of these regulations clearly states that an employee who works 40 hours or more (full-time employee) for a school, college or university is not eligible for the student exception. This part of the regulations excludes medical residents from the student exception.
5) Who can file FICA refund claims? Both the institutions that employed medical residents and individual medical residents may file refund claims. Institutions can be covered under FICA refund claims they filed themselves. Individual medical residents can be covered under FICA refund claims they filed themselves or under claims filed by the institutions that employed them.
6) Can a former University medical resident file a FICA refund claim for periods before April 1, 2005?
No. The period of limitations for filing a claim for tax periods before April 1, 2005 has expired. If you did not file an individual FICA refund claim, then the statute prevents you from recovering any the refunds in question.
7) Has the University filed any refund claims?
Yes, based on a recent court case in the 6th circuit, the University was able to file claims dating back to the calendar year 2005. Also, the University filed a protective refund claim for the 2006 year and, as things stand, intends to file for future years as well.
8) Who is eligible to receive a refund?
The University may seek a FICA tax refund on behalf of the medical residents for the period of January 1 to March 31, 2005. The savings are estimated to be approximately $800,000 for the University and $800,000 in the aggregate for medical residents. Please note that medical residents who did not have FICA tax withheld during the 3-month time period are not eligible for refunds. FICA tax was not withheld for individuals who were paid fellowships or who had a non-resident alien tax status. Further note that the IRS may disallow those claims for medical residents who did not participate in an accredited ACGME Program.
9) What step needs to be taken to secure these refunds?
For the University to file refund claims on behalf of the eligible medical residents mentioned above, it must obtain completed consent forms from these individuals.