Most people I talk to about their IRS problem have already built the worst-case scenario in their head. The reality is usually much more manageable. I'm Darrin Mish, and I've been representing taxpayers before the IRS for 32 years. Here's what actually tends to happen.
The Virginia Mason Medical Center in Seattle has sued the government August 6th for the return of about $3 million in Federal Insurance Contributions Act (FICA) taxes it paid on behalf of former hospital residents and fellows employed at the hospital between 1999 and 2004. The hospital contends that these doctors-in-training were not workers at the time and their payments should therefore have been exempted from payroll taxes. Although this viewpoint has been accepted by some federal appeals courts, it is rejected by the IRS. This case involves about 300 former trainee doctors, out of whom about 15 are still with the hospital as members of the staff.
According to Virginia Mason, the hospital has made applications to the IRS every year from April 2003 to April 2008 in a bid to retrieve refunds totaling $2.99 million on behalf of its trainee doctors. When they received no response from the IRS, the hospital decided to take this matter to the courts. They are claiming the refund of the $2.99 million plus interest and legal expenses bringing the total to about $3 million. This amount works out to a refund of approximately $10,000 per hospital resident and fellow.
No other hospital in Washington state has taken such measures in the ten years this situation has been ongoing, according to attorneys.
In the case of Virginia Mason, the hospital has residents who are graduate doctors with valid medical degrees who work full-time in the hospital under the supervision of a qualified, more experienced doctor. In their first years, hospital residents are called interns. They work shifts of up to 24 hours without a break and 100 hours per week. Fellows, on the other hand, are those who are pursuing their specialist medical degrees beyond their residency for between one to five years.
The IRS has maintained that payment to hospital residents and fellows are considered salaries under the FICA. Their pay stubs bear the term FICA. In view of this, the IRS disallows these payments to be considered students’ stipends which are exempted from tax. But the hospital maintains that they have complied with the requirements for student exemption and therefore are entitled for a refund on the stipends paid to the residents and fellows.
The issue is further complicated by the fact that various circuit courts in the country have made conflicting rulings on this matter. For instance in 1998, the 8th circuit court ruled in Minnesota that residents are eligible for tax exemption. The 2nd, 6th, 7th and 11th circuit courts ruled that the IRS could not rule out the use of the exemption by residents and each case is to be judged on a case-to-case basis.
Washington state is under the jurisdiction of the 9th circuit court which has not made a clear ruling on this issue. Hospitals in the state other than Virginia Mason have not made any application for refund of taxes under the FICA.