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MONTHLY TAX NEWSLETTER

February 2001

YOU MIGHT BE ENTITLED TO GET BACK $3,000 FROM THE GOVERNMENT FOR EVERY YEAR THAT YOU WERE A MEDICAL RESIDENT AFTER 1997
by Andrew D. Schwartz, CPA

Sounds too good to be true? Well, ask around, and you'll probably find that many of your colleagues have already received refunds from the federal government of social security and Medicare taxes that were withheld from their pay while they were residents.

Why is the Federal Government Being So Generous?

They have no choice. First, there was some ambiguity in the tax laws as they apply to medical residents being classified as employees or students. Then the IRS lost a court case and a subsequent appeal when they were challenged on their interpretation of the laws.

The rule in question deals with people who are employed by colleges, universities, and organizations (such as teaching hospitals) affiliated with colleges and universities. According to IRS code section 3121(b)(10), employees of universities and their affiliated entities need to be classified as either "student employees" or "career employees".

Employees classified as student employees are exempt from paying social security and Medicare taxes on money earned while employed at the school. This rule was most likely put in place to help students better afford their tuition and living expenses while enrolled in either an undergraduate or graduate program. (Social security and Medicare taxes are currently withheld at a rate of 7.65% of your gross salary.)

In the court case, the University of Minnesota was not withholding social security taxes from their medical residents claiming, instead, that the residents should be treated as student employees. The IRS assessed the university more than $8 million in unpaid Social Security taxes. The university took the IRS to court and won both the court case and the subsequent appeal, opening the door for medical residents to be classified as student employees instead of career employees, and thus, allowing the residents to receive refunds of social security and Medicare taxes withheld from their pay.

How Can You Get Back Social Security Taxes Withheld During Your Residency?

There are two ways that you can get back these taxes. The easiest way is to find out if your residency program will be submitting a "class action" claim on behalf of you and the other residents. If so, consider signing onto the class action if you'd like to get a refund of the social security taxes withheld. Please keep in mind that the IRS prefers to deal with the employer on this issue. (See What's the Downside before deciding.)

If your program will not be filing a class action on behalf of their residents, then you're on your own. As long as your employer was a university or a hospital affiliated with a university, consider preparing the paperwork yourself. Completing and filing the necessary paperwork, as addressed later in this article, is not too difficult at all. You should file either the 1040X or the 843, not both. 

Please keep in mind that if you do send in a Form 1040X, you won't be eligible to sign onto a class action filed by your program.

Recently, the IRS has requested that people who've submitted the Form 1040X submit a signed statement from their employer confirming that they have no intention of filing a "class action" on behalf of their medical residents.  You might want to get a signed letter from your hospital ahead of time and attach it to your 1040X or 843.

What's the Downside?

As in all cases, there's a downside which needs to be addressed prior to making your final decision. A few potential pitfalls are as follows:

  • First, the retirement benefit you ultimately receive from social security might be reduced if you receive a refund of social security taxes paid in during your residency. Remember, to collect social security, you need to pay into the system for 10 years. Plus, your benefit is based on your 35 years of highest earnings.

  • Also, if you moonlighted, and your combined salary and moonlighting income exceeded the social security maximum for that year, you might owe more in self-employment taxes than you would get back in social security taxes. The social security max was $68,400 in 1998, $72,600 in 1999, and $76,200 in 2000.

What's the Procedure?

Below is an e-mail that has been circulated to many of our clients from other young physicians. Please note that we have not written or edited this e-mail. Plus, the purpose of this newsletter is only to advise you that this opportunity exists. This newsletter does not contain any specific advice as to whether you should try to get back social security taxes withheld during your residency. For that reason, make sure to consult with your tax advisor before sending in the paperwork to get your social security and medicare taxes refunded. The e-mail reads as follows:

"Here is some interesting info: A friend from med school told me that he filed some forms with the IRS and got a complete refund of all the FICA taxes he paid as a resident! He got $3,000 per year of residency. He went to the IRS' website (www.irs.gov) and downloaded a 1040X (amended income tax) form. He then attached the following cover letter which a family friend drafted. It took him 8 weeks to get the refund, but how much moonlighting would you need to do to get $9,000? For those who don't know, the basis is a court decision stating that residents are officially "students" i.e cannot bill, avoid minimum wage, hours etc.. and, therefore, should be exempt from F.I.C.A. taxes.

Below is the statement to attach to the 1040X (amended tax return).

(Your Name)

(Insert fiscal Year) Federal Income Tax Return Form 1040

Social Security Number: (yours + spouse's if joint file)

(Your address)

Line 11 Being Changed:

 I am a student and Medical Resident at the University of (wherever). During (year) I received payment from the University for work performed as a student and medical resident. For the entire year (year) I was considered a student of the university. In 1998, the 8th Circuit Court of Appeals held in The State of Minnesota vs. Apfel, 151F.3d742, that medical residents are students and, therefore, exempt from paying FICA taxes. This case upheld a lower court opinion. In accordance with the opinion of the Court of Appeals, I am hereby amending my (year) Federal Income tax return to reflect my overpayment of FICA taxes in the amount of (insert line 11B form 1040X) and request a refund of this amount. I am aware of the fact that the Internal Revenue Service does not plan to challenge or seek further review of the opinion in the above-referenced case. I am also aware of the fact that a coalition of major universities throughout the country have discussed this issue and the above-referenced opinion with officials of the Internal Revenue Service including the Chief Counsel and it is my understanding that refunds of previously withheld FICA taxes have been approved.

I respectfully request that if my refund is not approved or if there is a lengthy delay in the process of approving this refund request, that this Amended Return and request for refund of FICA taxes be sent to the Appellate Division.

Thank you for your time and consideration."

How Many Years Can This Refund be Claimed?

Since the IRS generally requires that you submit an amended tax return (Form 1040X) within 3 years of the original due date of the tax return, including extensions, most people only had until 4/15/01 to amend their 1997 income tax returns. For that reason, it might be too late for you to get back the social security and Medicare taxes withheld during 1997.

You might still be eligible to receive a refund of your social security and Medicare taxes withheld between 1998 and 2000 if you were a medical resident during those years. Be aware, however, that the rules have been changed as they specifically apply to medical residents. Under the new rules (issued by the IRS after they lost their law suit and appeal), medical residents no longer qualify as "student employees". Even with the new ruling in place, however, we've heard that many of your colleagues have already received refunds of their FICA taxes withheld during 1998 and 1999 by filing 1040X's for those years.

What If the IRS Makes a Ruling About This Issue?

With the large number of 1040X's that were filed this winter, the IRS will most likely issue another ruling pertaining to medical residents being classified as "career employees" versus "student employees". We will make every effort to post any rulings relevant to this topic as soon as they are made available to us.

Good luck getting back these taxes, and please keep us posted whether or not your claim for refund was successful.

F.I.C.A. Refund Update - 5/11/07

More potentially good news!! The Court of Appeal for the 11th circuit held that the district court erred in ruling that medical residents enrolled in graduate medical education programs are precluded, as a matter of law, from seeking to rely on the student exemption to FICA taxation.  See http://www.irs.gov/pub/irs-tege/mount_sinai_ca11_decision.pdf.

F.I.C.A. Refund Update - 8/25/03

A lot is new!!!  And it's all good!  Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

F.I.C.A. Refund Update - 11/18/02

Doesn't look good for any more FICA refunds.  To find out the IRS' latest position on this issue, please read through the IRS' Chief Counsel Advice Memorandum.

F.I.C.A. Refund Update - 10/24/01

Just received this update from one of your colleagues. 

Bad News! I just spoke with a Senior IRS official in New York. He said, "Everyone who is filing for FICA tax returns and receives the check will be asked to RETURN the money with interest." He added that if you do not return the money, you will be charged 5% per month interest. He states that even those who received their checks initially are asked to return the money. ONLY foreigners will be exempt from FICA taxes, he stated. Oh well, so much for hype!

Please keep us up to date of any correspondence you receive from the IRS pertaining to your FICA refund claims, especially if you received a refund of your FICA taxes from the IRS.  We'll continue to keep our eyes open for any rulings issued by the IRS on this subject.

F.I.C.A. Refund Update - 9/14/01

It looks as if the IRS has prepared a uniform response to the FICA claims that have been filed.  We've had a handful of people fax us this exact letter which each of them had recently received from the IRS:

Dear Sir or Madam:

This letter is to inform you that we have received your claim for refund of FICA/Medicare tax filed for the period shown above.  However, in order to process the claim, we must have a signed statement from your employer stating that they are not going to refund the claim amount to you.  In addition, we will need you to complete and sign Form 843 in order to perfect your claim.

Please provide the information requested within 30 days from the date of this letter.  If we do not hear from you, your claim will be considered incomplete and will be closed with no further action taken.

Once we have received this information, we will place your claim in suspense because it is not among the claims we are actively examining.  The IRS is actively examining a representative sample of refund claims involving medical and dental residents and interns.  We hope these examinations will result in findings that cam be applied to refund claims involving similarly situated residency programs.  We believe this approach will ensure consistent application of the law and minimize the burden of taxpayers that would result if each claim were examined individually.

After we review findings from these examinations, we will be better able to estimate a time frame for resuming action on your refund claim.  We will advise you of the status of this project as it continues, and let you know if we need additional information.

We'll keep you updated as to how the IRS plans to proceed with this matter.  If you decide to file a refund claim, it looks like the IRS would prefer the Form 843 along with a signed statement from your employer. 

Please continue to keep us up to date of any correspondence you receive from the IRS pertaining to your FICA refund request.

F.I.C.A. Refund Update - 8/09/01

Today we received this e-mail from Ann Arbor, MI.  Please keep in mind that this is the first and only time that anyone has informed us that they received this information from the IRS.  The question is whether the IRS agent was giving out accurate information. 

"Just spoke with an IRS representative regarding my tax refund for FICA paid as a medical resident.  He informed me that all requests for refunds referring to Minn vs Apfel have been suspended by the National Office until further notice.  Was not given a time frame as to when the IRS will begin to re-address this situation.  In the meantime, I am to have a letter from my employer stating that they will not be filing a class action on behalf of the residents.  So, it could be a very long time until we see this money, or perhaps not at all."

Who knows what this means.  We're still hearing from people who have recently received a refund of their FICA taxes.  On the other hand, many people have received a notice from the IRS requesting that they obtain a signed statement from their employer stating that they have no intention of filing a class action against the IRS.  If anyone has spoken with the IRS and been told something similar to this person's e-mail, please let us know.  We'll keep our eyes open for any pronouncements made by the IRS on this topic, and post them on this page as soon as we find anything out.

F.I.C.A Refund Update - 4/27/01

We've started hearing from people who sent in their Form 1040X's. Some people have already received their refunds. Unfortunately, other refund requests were denied. Two people were informed by the IRS that they should have filed a Form 843, Claim for Refund and Request for Abatement, instead of a Form 1040X. An example of a completed 843 is available at 843.pdf. If you'd prefer to complete a Form 843, you can download it from the IRS's website (www.irs.gov).  Please don't file both forms, however.

We heard yesterday that another person who lives in Boston was denied his refund request as well. This time, the IRS stated in the rejection letter that the State of Minnesota vs Apfel was decided in a court that does not have jurisdiction over Massachusetts. (We don't understand how the facts and circumstances surrounding a medical resident from Minnesota can be much different from a medical resident who lives in another part of the country.) Hopefully, this rejection won't become the trend.

If your refund claim was denied, please let us know.  You can either call us at 1-800-471-0045, or send us an e-mail at cpa@mdtaxes.com.

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copyright - 2007 - CPANiche, LLC

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WHAT'S NEW WITH THE FICA REFUND?

Most recent information issued by the IRS

Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

For more information, go to our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Copyright 2007 The MDTAXES Network by CPANiche, LLC      Email us at  info@cpaniche.com