Sunday, November 19, 2006

IRS ALLOWS FORMULA CALCULATION OF TELEPHONE TAX REFUNDS

The IRS has previously acknowledged that telephone communications for which a toll charge varies only with elapsed time, and not distance, is not subject to the Section 4242(b)(1) excise tax. Refunds or credits are available for amounts paid for long distance service that was billed to taxpayers for the 41-month period from after February 28, 2003 to before August 1, 2006. Instead of manually going through old telephone bills, business and tax-exempt organizations that were subject to the tax have now been provided with a short-cut formula method that they can use to seek a refund.

To request a refund, businesses (including sole proprietors, corporations, and partnerships) and tax-exempt organizations must complete Form 8913, Credit for Federal Telephone Excise Tax Paid. In filling out the form, businesses and tax-exempt organizations may determine the actual amount of refundable long-distance telephone excise taxes they paid for the 41 months from March 2003 through July 2006, or use the formula to figure their refunds. Businesses should attach Form 8913 to their regular 2006 income tax returns. Tax-exempt organizations must attach it to Form 990-T.

Under the formula method, businesses and tax-exempt organizations 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 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 only included 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 limited to 2 percent of the total telephone expenses for businesses and tax-exempt organizations with 250 or fewer employees. Larger organizations have a 1 percent cap.

For more information, see IR-2006-179.
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