EXCESS TELEPHONE TAX REFUNDS BEING FILED

As we previously wrote about, in 2006 the IRS acknowledged that telephone communications for a which a toll charge varied with elapsed time and not distance were not taxable. Taxpayers are allowed to file for a refund on their 2006 returns for such telephone taxes that were previously paid. A credit for the paid taxes can be obtained either by using certain safe harbor dollar amounts, or by calculating and requesting a credit for the actual amount of taxes paid.

The IRS has indicating that in reviewing 2006 tax returns that have already been filed, some taxpayers are (intentionally or unintentionally) abusing the system by seeking refunds for more than they are entitled. For example, some taxpayers are requesting refunds for the entire amount of their phone bills, not the just 3% tax on long-distance and bundled services. Others are making requests for thousands of dollars, indicating phone bills in excess of $100,000, which amounts exceed their entire income!

The IRS is now warning taxpayers that indiviuals requesting an inflated amount may see their entire refund frozen, may have their tax returns audited, and could even face criminal prosecution.

IR News Release 2007-16 (January 25, 2007)

APPLICABLE FEDERAL RATES - FEBRUARY 2007

February 2007 Applicable Federal Rates Summary:

-Short Term AFR - Semi-annual Compounding - 4.87%
(4.82%/January -- 4.91%/December -- 4.83%/November)

-Mid Term AFR - Semi-annual Compounding - 4.64%
(4.53%/January -- 4.68%/December -- 4.64%/November)

-Long Term AFR - Semi-annual Compounding - 4.80%
(4.68%/January -- 4.84%/December -- 4.84%/November)

DIRECTION OF RATES: Up

A PAINLESS COURSE IN EXEMPT ORGANIZATION ISSUES

Section 501(c)(3) status for an organization provides many benefits. Key among them are:

• Exemption from Federal income tax
• Tax-deductible contributions
• Possible exemption from state income, sales, and employment taxes
• Reduced postal rates
• Exemption from Federal unemployment tax
• Tax-exempt financing.

Qualifying for and obtaining recognition of Section 501(c)(3) status requires meeting stringent IRS requirements. Further, once status is recognized, the organization must operate within IRS parameters to maintain their exemption. There are also special IRS tax return requirements, the vagaries of taxable unrelated business income, and special treatment of employees, that must be dealt with. Few individuals new to the area are conversant with these rules, and indeed, many tax practitioners who do not regularly practice in the area may only have generalized knowledge of the rules.

The IRS has put out an excellent resource to educate those involved in the exempt organizations world on all of these issues. Two words that almost never are used together in the same sentence are "tax" and "entertaining," but I am about to do so. At a new website, http://www.stayexempt.org/, the IRS has created an entertaining method of educating interested persons about these tax issues. Avoiding a mere dry recitation of rules and regulations, the Service is to be applauded for attempting to ease the burden of learning about these rules by including games, challenges, graphics, and sound files to make the education process as painless as possible.

This is an excellent website for practitioners to direct their clients, to help them with their exempt organizations and applicable compliance burdens. Tax practitioners may also benefit from a visit, if only for a refresher on some aspects of exempt organizations they may not have thought about recently.