IRS agrees to refund excise tax with interest on long-distance phone charges

By Michael Dillon, SC&H Group

Following a string of losses at the federal appellate and district court levels, the Internal Revenue Service recently agreed to stop collecting the federal excise tax on long-distance telephone services as of July 31, 2006. In addition, it has agreed to refund the excise taxes collected on these services over the last three years.

The IRS now owes large refunds with interest to companies and individuals that have paid federal excise taxes on long-distance services. You may be a candidate for a significant refund. Please read the details below to see if you qualify.

Background

Following a string of losses at the federal appellate and district court levels, the IRS ultimately agreed that long-distance charges that vary only by time elapsed (and not by distance) are not subject to the federal communications excise tax of 3 percent, a luxury tax that has been in effect since 1898, when it was enacted as a means of funding the Spanish-American War. (IRS Notice 2006-50; Internal Revenue Bulletin 2006-25 (June 19, 2006); Internal Revenue News Release IR-2006-82.) A recent report by the Congressional Research Service estimated that the excise tax generated nearly $6 billion in revenue in fiscal 2005. (The Telephone Excise Tax: An Economic Analysis, Congressional Research Service, April 24, 2006.)

With this new ruling, the IRS will stop collecting the tax on all long-distance and bundled long-distance services, even those services billed on both a time and distance basis. The key points of the IRS’s new policy concerning the communications excise tax are as follows:

Long-distance is non-taxable: All long-distance services, bundled service plans that do not itemize local services, voice-over-Internet protocol (VoIP), prepaid calling cards and plans provided for a flat monthly fee are non-taxable. Only local service charges will be taxable.
Refunds will be made with interest: The IRS will refund all tax with interest to taxpayers that have paid excise tax billed to them on long-distance charges for the period beginning after Feb. 28, 2003 and before Aug. 1, 2006. To claim the refund, taxpayers must request the refund from the service provider who collected that tax, or request a refund of tax only on their 2006 federal income tax return. Those not otherwise required to file a return must still do so to obtain a refund for these periods, unless a refund is obtained from the service provider who collected it. For periods beginning after July 1, 2006, the IRS will deny any refund claim and direct the taxpayer to obtain a refund from the service provider who collected the tax.
Service providers will stop collecting taxes: For periods beginning after July 1, 2006, the IRS instructs service providers to stop collecting the excise tax on the long-distance and other nontaxable charges noted above. Service providers will be entitled to claim the refunds only if they have repaid those amounts to the taxpayer.
Instructions for obtaining a refund: The various income tax forms for 2006 will contain instructions for taxpayers to certify that they have not obtained or will not obtain a refund from their service provider and will withdraw any previously filed refund claims for the same. With the exception of a safe harbor amount (see below), taxpayers will be required to retain the appropriate documentation to support the claim.
Safe harbor amount: Taxpayers will be permitted to request a safe harbor amount without having to substantiate their claim, provided they certify that they have not obtained or will not obtain a refund from their service provider and will withdraw any previously filed refund claims for the same.

What this means for you

If you have historically purchased long-distance services now deemed non-taxable by the IRS, you may be eligible to claim a refund of these taxes, with interest. Taxpayers will be required to claim the refund on their 2006 federal income tax return, provided they certify that they have not obtained or will not obtain a refund from their service provider and will withdraw any previously filed refund claims for the same. Taxpayers are also permitted to request a safe harbor amount without having to substantiate their claim.

Michael Dillon is part of SC&H Group. SC&H has experience in identifying and preparing claims for refund of the federal excise tax and can assist in maximizing and securing this refund opportunity for you. Contact them at info@scandh.com or (410) 403-1500.

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