On June 19th, 2006 the Commissioner of the Internal Revenue Service agreed to credit or refund the amounts paid for nontaxable telephone service.  The IRS conceded that telephone communications for which a toll charge varies only with elapsed time, and not distance, is not subject to the telephone excise tax under Code Sec. 4242(b)(1).  Accordingly, refunds or credits are available for amounts paid for long distance service that was billed to taxpayers for a 41-month period, i.e., after Feb. 28, 2003, and before Aug. 1, 2006.

To request a refund, Form 8913, Credit for Federal Telephone Excise Tax Paid, must be completed.  In completing this 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.   

The IRS has now provided a formula method that businesses (including sole proprietors, corporations, and partnerships, as well as trust and estates) and tax-exempt organizations can use to estimate the amount of their telephone excise tax refunds.

Businesses and tax-exempt organizations can 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 the bills with statement dates in April 2006 and September 2006.  They must first figure the telephone tax as a percentage of their April 2006 telephone bill (which included the excise tax for both local and long-distance service) and their September 2006 telephone bill (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 expense for the businesses and tax-exempt organizations with 250 or fewer employees.  The refund is capped at 1% for those with more than 250 employees.      

Illustration:  Business X has an April 2006 telephone bill of $1,000, which includes telephone excise tax of $28.  The tax percentage is 2.8% ($28 / $1,000).  If the September 2006 bill is $1,100 including telephone excise tax of $16.50, the tax percentage is 1.5% ($16.50 / $1,100).  X’s long=distance excise tax percentage is 1.3% (2.8% for April minus 1.5% for September).  The business multiplies the 1.3% by its total phone expenses over the 41-month period o arrive at the amount of its refund.  If X has more than 250 employees, its refund is limited to 1% of its total phone expenses for the period.  If the business had 250 or fewer employees, the 2% cap would apply and would not limit the amount of the refund. 

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 formula can be used even if the organization or business only operated for part of the 41-month period.  However, a refund can only be requested for months for which the telephone tax was paid.  If the entity was not in business or operating April through September 2006, the formula cannot be used.  The IRS notes that use of the formula is optional.  Any business or tax-exempt organization can request a refund based on the actual amount of long-distance excise tax billed during the 41-month period. 
Due to the complexity of this issue, it is advisable to schedule an appointment with one of our tax professionals to complete the process for properly making your claim for refund or credit.    Call us at 785-272-4484 or visit us on the web at www.ssccpas.com to set up your appointment today.