Telephone Tax Refund —
How To Get Yours

In May 2006, as a result of a court decision, the IRS announced it would stop collecting the federal excise tax on time-based long distance telephone service beginning August 1, 2006. The IRS also said that it would provide refunds for those excise taxes billed after February 28, 2003.

Now the IRS has announced how to obtain those refunds. The process differs depending on whether you are seeking the refund individually or as a business or tax-exempt organization.

Individual Refunds

Individuals can claim refunds of the telephone excise taxes they paid by filling in the applicable information on their 2006 federal income-tax returns. There are two alternative calculation methods you can use:

• Calculate the actual tax paid, using old telephone bills to identify the refundable amounts or
• Use a standard deduction amount.

The standard amount is based on the total number of personal exemptions claimed on your 2006 federal income tax return (filed in 2007). The amount of the refund is $30 for a person claiming one exemption, $40 for two exemptions, $50 for three exemptions, and $60 for four or more exemptions.

Example: Joint filers Joe and Mary have three dependent children and claim a total of five personal exemptions. They would be eligible for the maximum $60 refund.

Business and Tax-exempt Refunds

The IRS has also provided an optional formula to be used by businesses (including sole proprietors, corporations, and partnerships, as well as trusts and estates) and tax-exempt organizations in estimating their telephone excise tax refunds.

Affected businesses and tax-exempts must fill out Form 8913, Credit for Federal Telephone Excise Tax Paid. As with individuals, businesses and tax-exempts may figure the actual amount of refundable excise taxes they paid for the 41 months for which taxes are being refunded. Or they can use the IRS formula to compute their refunds.

The formula involves comparing two telephone bills to determine the percentage of the entity’s telephone expenses attributable to the long distance excise tax. The bills used are the bills with statement dates in April 2006 (in which both the long distance service excise tax and local service excise tax were charged) and September 2006 (in which the long distance tax was not charged).

First, figure the full telephone excise tax as a percentage of the April 2006 bill. Then, figure the excise tax as a percentage of the September 2006 bill. The difference between the two percentages should then be applied to the entity’s quarterly or annual telephone expenses after February 28, 2003, and before August 1, 2006, to determine the amount of the long distance tax refund.

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.

Example: Your business had an April 2006 telephone bill of $1,000, which includes federal telephone excise tax of $28, or 2.8%. The September 2006 bill was $1,100 including excise tax of $16.50, or 1.5%. The long distance excise tax percentage is 1.3% (2.8% - 1.5%). Your business would then multiply its total telephone expenses over the affected 41 months by 1.3% to determine the refundable amount. If you have 250 or fewer employees, you could claim a refund for the full amount. Your refund would be limited to 1% of your phone expenses if you have more than 250 employees.

Businesses should attach Form 8913 to their regular 2006 income-tax returns (if you are a sole proprietor, you have some reporting options; see us for details). Tax-exempts should attach Form 8913 to Form 990-T.

We Can Help

Our firm provides a full range of tax planning and tax-return preparation services. If we can be of assistance to you regarding the telephone excise tax refund or any of your tax needs, please let us know.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.