The government's request for a bright-line rule that medical residents never qualify for the "student exception" in Code Sec. 3121 was denied because a case-by-case determination was required. A factual inquiry into the relationship between a corporation that operated medical residency programs and its medical residents was required to determine whether the corporation was entitled to a refund of FICA taxes. The inquiry would determine whether the residents qualified for the "student exception" and whether the stipends paid to them were exempt from FICA taxes.  Please read the following article from CCH Incorporated for more information: Center for Family Medicine.pdf.

A university hospital was not precluded by law from claiming the student exclusion from FICA taxes for its medical residents and, therefore, the IRS's motion for summary judgment was denied. The IRS argued that the student exclusion is limited to individuals who earn a nominal amount; thus, the medical residents, who earned significant sums, were by law ineligible for the exclusion. However, Reg. §31.3121(b)(10)-2(b) states that, for purposes of the student exclusion, the amount earned by the employee is immaterial. Because the regulations language is clear, there was no reason to rely on the legislative history of the underlying code section or the IRS's interpretation of the regulation to determine its meaning.  Please read the following article from CCH Incorporated for more information: University of Chicago Hospital.pdf.

Points discussed in the IRS Tax Talk Today webcast program on October 17:

Employers need special software to electronically file information returns and should check IRS Publication 1221 for more information. Information returns are due on February 28 unless they are e-filed; those returns are due on March 31. Companies who were planning to take advantage of the later filing date got in trouble because they discovered in late March that they did not have the capability to e-file.

Employers can use an online service provided by the Social Security Administration (SSA) at www.SSA.gov to verify employee information. If an employee lacks a social security number, the employer should put down all zeroes and should direct the employee to apply to the SSA for a number.

Employers and workers who are unsure whether the individual is an employee or independent contractor have several sources of information: filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS requesting classification; looking on the IRS website, which has IRS training material; and checking Publication 15, Employers Tax Guide. If the worker believes that he or she has been classified incorrectly, he or she should go back to the payor to correct the situation. Otherwise, the IRS takes phone calls beginning in mid-February from independent contractors requesting a change.

The Service is educating the public about problem areas, such as the reporting of tips on Form 4137, Social Security and Medicare Tax on Unreported Tip Income. The IRS will begin to enter into tip reporting agreements with small businesses as well as larger companies. A new agreement will become available in 2007.

Reporting of deferred compensation under Code Sec. 409A is still under speculation.

The IRS has revised Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to provide information for designated Roth IRAs. The form shows contributions, which are after-tax, and the year the account was established. An account must operate for five years before the owner can take distributions tax-free. New reporting codes will be AA for contributions to a Code Sec. 401(k) plan and BB for contributions to a Code Sec. 403(b) plan.

The IRS has devised a new Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for reporting unemployment taxes. The new form combines Form 940 and Form 940-EZ. The due date for the form is still January 31, 2007.

Regarding IRS service centers, the Philadelphia service center is no longer being used for employment forms. Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, still goes to Ogden, Utah.


For further information on the items above contact: Catherine Bonnes at 269.567.4557 or Forrest Lewis at 517.336.7522.