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December 10, 2006 - I have recently heard about a telephone excise tax refund available for 2006 tax returns. Can you tell me how I get the telephone tax refund?

The IRS recently conceded that telephone calls for which charges were based on only time and not distance were not subject to excise tax and as a result announced that effective August 1, 2006, it will stop collecting the federal excise tax on long-distance telephone service. Accordingly, taxpayers have a one-time opportunity to collect a refund or credit of amounts paid for service that was billed during a 41-month period, i.e., after February 28, 2003, and before August 1, 2006.

Individuals (including Schedule C filers), but not other taxpayers, can request a refund or credit on their 2006 tax return using either the actual amount of tax paid for nontaxable services, or a standard amount. Individuals using the standard amount are not required to submit or keep any documentation to support their refund request. To use the standard amount, individuals must (1) have paid all taxes billed by their service provider during the 41-month period; (2) have not received a credit or refund from the service provider, and (3) have not requested a credit or refund from the service provider or have withdrawn any such request. The standard amounts, which are based on the total number of exemptions claimed on the taxpayer's 2006 federal income tax return, are:

  • $30 for a person filing a return with one exemption;
  • $40 for a person filing a return with two exemptions;
  • $50 for a person filing a return with three exemptions;
  • $60 for a person filing a return with four or more exemptions.

Businesses and tax-exempt organizations are not provided a standard amount and were initially left to base their refund on the actual amount of tax paid. However, the IRS has recently provided a formula method that businesses, including sole proprietors, corporations, and partnerships, as well as trusts and estates, and tax-exempt organizations may use to estimate the amount of their telephone excise tax refunds.

Businesses and tax-exempt organizations may 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 that should be used are the bills with statement dates in April 2006 and September 2006. First, they must 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 included only 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 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.

Alternatively, telephone expenses can be estimated based on the amounts reported as business-related telephone expense on tax returns for tax years 2003 through 2006, prorating the telephone expense for a particular year if part of the year falls outside the 41-month refund period.

The use of the formula is optional. Any business or tax-exempt organization can request a refund using the actual amount of long-distance excise tax billed during the 41-month period. Finally, for businesses to request a refund, Form 8913, Credit for Federal Telephone Excise Tax Paid, must be attached to their regular 2006 income tax return. Tax-exempt organizations must attach it to Form 990-T.

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