Wednesday, March 31, 2010

Hospitals Eligible for Medical Resident Tax Refunds Filed before April 1, 2005

According to an IRS announcement, institutions that filed FICA tax refund claims for medical residents in tax years ending before April 1, 2005 will be granted their claims, despite the current policy which bars the refunds.

Prior to April 1, 2005, residents qualified for "student" status tax exemption for services performed "incident to and for the purpose of pursuing a course of study." However, this exemption did not apply to residents, who were considered "full-time employees," and they were subject to a a FICA employment tax on their wages. Several teaching hospitals had challenged their rejected claims in appellate court, with some courts granting the claims, and others siding with the IRS.

The current Treasury Regulations, which went into effect on April 1, 2005, treat medical residents as full-time employees subject to the FICA tax, and ineligible for refunds. The IRS' announcement states that those teaching hospitals that filed claims for their residents prior to the April 1, 2005 regulation will be contacted by the IRS with steps on how to obtain their refunds.

Source: Drinker Biddle & Reath LLP

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