Guest Article

(From the April 5, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Sheds Light on FICA Refund Interest Rates

A recently released IRS Chief Counsel Memorandum addresses the interest rates to be used in calculating FICA tax refunds.

Different Interest Rates Can Apply to Employer and Employee Portions

The IRS has accepted the position that medical residents were not subject to FICA tax for periods ending before April 1, 2005, the date new FICA Regulations became effective. A recently released IRS Chief Counsel Memorandum outlines the law and analysis that is used in determining the interest rate to apply to such FICA tax refunds. It notes that Code § 6611(a) provides three different rates for computing interest on the overpayment of tax:

In situations involving an overpayment of FICA taxes, there are three ways in which refunds of overpayments can be processed, reflecting the fact FICA taxes include a tax on employers and a separate tax on employees withheld by the employer. The Memorandum examines three scenarios in which an employer files a claim for refund of overpayment of FICA taxes:

With Scenario 1, the Memorandum explains that, because the employer reimbursed or repaid the FICA tax overpayment to its employees before filing a claim for refund, the tax overpayment is made exclusively by the employer. In that case, interest on the overpayment is credited at the employer rate if it is a corporation (i.e., either the Small Refund Corporate Rate or the GATT Rate, depending on the amount of the overpayment) or the Regular Rate if the employer is not a corporation. The same analysis applies under Scenario 3 to employer-only claims.

Under Scenario 2, however, different interest rates can apply to the employer and employee portion of the refund. Where the employer will be paying a portion of the refund over to the employee, the interest on the employee's portion is credited at the Regular Rate. Interest at the Regular Rate would also be credited on the employer's portion if the employer is not a corporation. If the employer is a corporation, however, interest would be credited at the appropriate employer rate.

Although the Memorandum may not be used or cited as precedent, it sheds light on how the IRS applies the different interest rates to differing FICA refund claims. The Memorandum may be found on the IRS web site at: www.irs.gov.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.