After suffering several defeats in the courts, the IRS has finally conceded that long-distance phone services are not subject to federal excise tax. As a result, both individual and business taxpayers are in line for refunds or credits on their 2006 tax returns.
The IRS has provided the details in new Notice 2006-50. Further guidance is expected in the near future.
Background: The excise tax on long-distance services, currently set at 3%, was first imposed to help finance the Spanish-American War. The IRS now says it will issue credits or refunds of excise taxes paid on long-distance services billed between February 28, 2003, and August 1, 2006-plus interest.
Under its new Notice, the IRS will not collect the 3% tax anymore. Some of the other issues clarified by the IRS in the notice are as follows:
*Both long-distance service and "bundled" services (i.e., local and long-distance service provided under the same charge) are exempt from the excise tax. But the tax will continue to be collected for local-only services.
*The IRS will deny all taxpayer requests for refunds of tax on nontaxable services billed after July 31, 2006. Such requests should instead be directed to the collectors (e.g., telephone companies).
*Taxpayers may request a credit or refund of tax only on their 2006 federal income tax returns.
*The refunds or credits are available to partnerships, S corporations, estates and trusts, tax‑exempt organizations, corporations and other non-filing entities. The amounts for pass‑through entities will be reflected on their Schedule K-1s.
Surprisingly, the IRS also conceded that the federal excise tax does not apply to wireless telephone services and prepaid calling cards. Those issues weren't litigated in the recent court cases the IRS lost.
Note: Although the IRS is developing a "safe harbor" method for individuals, including self‑employed taxpayers, it will probably be lower than the actual tax you have paid. If you have kept statements of your bills, you may qualify for a higher refund or credit.
For Q & A from the IRS website
that explains this tax credit in more detail
click here.
