Tax Tip for
October 2006
Telephone
Excise Tax Refunds
IRS Concedes
Telephone Excise Tax Issue & Provides Method for Receiving Refunds
IRS has announced the
standard amounts—ranging from $30 to $60—that individual long-distance customers
can use to compute their telephone excise tax refund under the safe harbor
method provided by IRS. To use the standard amount, most taxpayers will only
have to fill out one line on their regular 2006 return.
Observation:
As further clarified in “Telephone Tax Refund
Questions and Answers” on IRS's web page, taxpayers don't need to itemize to
claim this refund.
Background.
In Notice 2006-50, 2006-25 IRB , IRS conceded
that telephone communications for which a toll charge varied only with elapsed
time, and not distance, wasn't taxable under Code Sec. 4252(b)(1) . Accordingly,
taxpayers or collectors of the tax could request a credit or refund of amounts
paid for service that was billed to taxpayers after Feb. 28, 2003, and before
Aug. 1, 2006 (“the relevant period”), but only on their 2006 income tax returns
(the income tax return for calendar year 2006 or the first tax year including
Dec. 31, 2006). IRS is creating a special short form (Form 1040EZ-T) for
individuals who don't need to file a regular return.
Individuals (including
Schedule C filers), but not other taxpayers, may request a refund or credit
using either the actual amount of tax paid for nontaxable services or the safe
harbor amount. Individuals using the safe harbor amount aren't required to
submit or keep any documentation to support their refund request. To use the
safe harbor amount, individuals must (1) have paid all taxes billed by their
service provider after Feb. 28, 2003, and before Aug. 1, 2006; (2) have not
received a credit or refund of these taxes from the service provider, and (3)
either have not requested a credit or refund from the service provider or have
withdrawn any such request. (Notice 2006-50, Sec. 5(c) )
Observation:
Taxpayers not using the safe harbor amount must be
able to substantiate their refund claim. For example, they must have bills
showing the tax charged for nontaxable services for each month and receipts,
canceled checks, or other evidence that the tax was actually paid.
Standard telephone
excise tax refund under safe harbor. In
IR 2006-137, IRS announces that the standard amounts for telephone excise tax
refunds under the safe harbor in Notice 2006-50 will range from $30 to $60. The
standard amounts, which are based on the total number of exemptions claimed on
the taxpayer's 2006 federal income tax return, are:
... $30 for a person filing a return with one
exemption;
... $40 for a person filing a return with two
exemptions;
... $50 for a person filing a return with three
exemptions; and
... $60 for a person filing a return with four or
more exemptions.
Observation:
As explained in “Telephone Tax Refund Questions and
Answers” on IRS's web page, taxpayers won't get the telephone tax refund in a
separate check. The refund will be treated as a one-time payment on a taxpayer's
2006 return. It will reduce the amount that a taxpayer otherwise owes on his
return or increase the amount of his refund.
IRS says that the
standard amounts are based on actual telephone usage data, and that the standard
amount applicable to a family or other household reflects the long-distance
phone tax paid by similarly sized families or households.
IRS Commissioner Mark
W. Everson emphasizes that this is the easiest way to get a telephone excise tax
refund. “These amounts save taxpayers from locating 41 months of old phone bills
and analyzing these bills to determine the taxes paid,” he said.
Rules for businesses and
tax-exempts.
IRS has now provided a formula method that businesses (including sole
proprietors, corporations, and partnerships, as well as trusts and estates) and
tax-exempt organizations may use to estimate the amount of their telephone
excise tax refunds.
Businesses and tax-exempt
organizations may figure their refund amounts by comparing two telephone bills
to determine the percentage of their telephone expenses attributable to the
long-distance excise tax. The bills they should use are the bills with statement
dates in April 2006 and September 2006. They must first figure the telephone tax
as a percentage of their April 2006 telephone bills (which included the excise
tax for both local and long-distance service) and their September 2006 telephone
bills (which included only the tax on local service). The difference between
these two percentages should then be applied to the quarterly or annual
telephone expenses to determine the amount of their refunds. The refund is
capped at 2% of the total telephone expenses for businesses and tax-exempt
organizations with 250 or fewer employees. The refund is capped at 1% for those
with more than 250 employees.
Illustration :
Business X has an April 2006 telephone bill of $1,000, which includes telephone
excise tax of $28. The tax percentage is 2.8% ($28 ÷ $1,000). If the September
2006 bill is $1,100 including telephone excise tax of $16.50, the tax percentage
is 1.5% ($16.50 ÷ $1,100). X's long-distance excise tax percentage is 1.3% (2.8%
for April minus 1.5% for September). The business multiplies 1.3% by its total
phone expenses over the 41-month period to arrive at the amount of its refund.
If the business had 250 or fewer employees, the 2% cap would apply and would not
limit the amount of the refund.
Alternatively, telephone
expenses can be estimated based on the amounts reported as business-related
telephone expense on tax returns for tax years 2003 through 2006 (prorating the
telephone expense for a particular year if part of the year falls outside the
41-month refund period).
The formula can be used
even if the organization or business only operated for part of the 41-month
period. However, a refund can only be requested for months for which the
telephone tax was paid. If the entity was not in business or operating April
through September 2006, the formula cannot be used.
IRS notes that use of the
formula is optional. Any business or tax-exempt organization can request a
refund based on the actual amount of long-distance excise tax billed during the
41-month period.
