IRS will accept telephone excise tax refunds claims until July 27, 2012
The IRS has announced (Announcement 2012-16) it will continue to accept claims for telephone excise tax refunds requested on or before July 27, 2012. The announcement offers a final opportunity for businesses and individuals to file for refunds of the 3 percent tax collected on long-distance, bundled and cellular phone service billed between March 1, 2003, and July 31, 2006. Retailers may also be entitled to refunds of excise tax they paid on prepaid telephone cards and prepaid cellular telephones. The IRS will not process refund requests submitted after July 27, 2012.
Telephone excise tax
Under Section 4251, the telephone excise tax is a 3 percent tax on the cost of local phone service and long distance "toll" service that is charged by distance and transmission time. The IRS continued to collect the tax on most long-distance and bundled phone services long after phone companies had stopped charging for calls based on distance. But after losing a string of court cases, the IRS in 2006 (Notice 2006-50) conceded and announced it would no longer collect the tax on most long-distance, bundled or cellular services.
The tax is no longer imposed on any bundled landline or cellular service that does not specifically break out the cost of local service (in which case the tax is imposed only on local service), and it is not imposed on long-distance service unless the cost varies by both the distance and duration of the call. Notice 2006-50 offered refunds for taxes billed between March 1, 2003, and July 31, 2006, including interest.
The IRS provided that refunds could be claimed only on the 2006 income tax return. Taxpayers who overlooked the opportunity on an originally filed 2006 return could file an amended return to claim their refund until the statute of limitations closed for the 2006 year.
New refund opportunity
Taxpayers have since challenged the guidance under Notice 2006-50 under the Administrative Procedure Act, arguing that the IRS did not comply with notice and comment rules. In response, the IRS has announced it will still process and honor requests for telephone excise tax refunds made on or before July 27, 2012.
The IRS announcement offers a substantial refund opportunity for taxpayers that have not yet obtained refunds. Most business long-distance phone service was provided on a "postalized" (i.e., not distance-sensitive), or bundled, basis and was improperly taxed from 2003 to 2006. Businesses purchasing these services would be entitled to a refund of as much as 3 percent of the total cost of their telephone service. Nearly all cellular service would also qualify for a refund. The IRS has reported several times that only a fraction of eligible businesses ever claimed their refunds.
Next steps
Grant Thornton can assist taxpayers seeking a refund based on either the actual amount of tax paid to telephone carriers or according to the formula outlined in Notice 2005-79.
Grant Thornton can help evaluate which method will generate the greatest benefit, considering the increased administrative burden of using the actual payment method versus the reduced refund percentage and computational quirks of the formula method.
For taxpayers using the actual payment method, Grant Thornton can examine telephone bills from 2003 through 2006 and determine how much tax paid by the taxpayer qualifies for refund, prepare schedules summarizing the refund and compute interest on the refund amounts. Grant Thornton can also use the telephone bills to compute the IRS-prescribed refund percentage and apply it to total telephone expense for the 41-month refund period. Grant Thornton can then assist in filing for the refund.
Key points to remember include the following:
- The tax is refundable even for taxpayers in a loss position.
- Taxpayers may need to request billing information from their phone company from March 1, 2003, through August 1, 2006.
- The taxpayer must have purchased service directly from a carrier or reseller.
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