Immediate action may be necessary to secure refunds of Social Security taxes for 2006.
A District Court Case recently held that severance payments made by a bankrupt retailer to employees were not subject to Social Security taxes. While there is a good likelihood that the IRS will appeal since they won an Appeals Court case in 2008, companies should consider filing protective refund claims citing this new decision. It is critical if this issue applied in 2006 to file a protective claim immediately since the statute of limitations generally expires three years after the due date of tax returns. With a protective claim for refund, the IRS holds the claim until the case is ultimately decided. If the IRS ultimately loses its appeal, it will be required to honor the protective refund claim.
Severance payments refunds may also be available for 2007 and 2008, and you will need to take this new case into consideration for 2009.
Those affected should contact the company that laid them off to see if they are filing for the potential refunds.
Julie Welch, CPA, CFP
Meara Welch Browne, P.C.