After seeing its position repeatedly rejected by federal courts, the Internal Revenue Service this week conceded  (partially) that it has been wrong about whether the annual stipends that teaching hospitals and universities pay to medical residents are subject to payroll taxes.
The tax agency has lost a steady stream of court cases  in which it argued that doctors in training do not qualify under the "student exception"  to the Federal Insurance Contributions Act that says that Social Security and Medicare taxes "do not apply to service performed by students employed by a school, college, or university where the student is pursuing a course of study." The IRS maintained that medical residents, during their post-medical school period of training, are employees.
Universities and medical schools have submitted claims believed to be in the hundreds of millions of dollars in the last 10 to 15 years, some of which were contested in court and some of which were settled. In 2005, in the face of those court losses, the IRS published new regulations  that codified its stance that residents are not students.
A round of lawsuits  challenging those 2005 rules have developed, and last year a federal appeals court sided with the IRS in one of those cases, involving the University of Minnesota and the Mayo Foundation for Medical Education and Research. The Minnesota institutions have asked the U.S. Supreme Court to hear their appeal, and a coalition of college and medical groups has filed a friend of the court brief  urging the high court to take the case.
The IRS is standing firmly behind the 2005 rules. But perhaps reading the writing on the wall (or, more accurately, in the appeals court briefs), the agency said this week that it had "made an administrative determination to accept the position that medical residents are excepted from FICA taxes based on the student exception for tax periods ending before April 1, 2005," when the new regulations took effect.
The agency's news release said that its officials would "begin contacting hospitals, universities and medical residents who filed FICA (social security and Medicare tax) refund claims for these periods with more information and procedures" about how to get their refunds.
Ivy S. Baer, director & regulatory counsel at the Association of American Medical Colleges, said it was unclear how many universities and teaching hospitals (or individual medical residents) still had outstanding claims from before the 2005 rules took effect, and how much money was at stake. But she said she had heard from a few institutions that "anticipated getting multiple millions of dollars."
The IRS's concession does not affect its stance in the Minnesota case or other cases based on the post-2005 rules, Baer said. "Still, we're happy they did" make that change, she said.