Telephone Excise Tax

Last May, the IRS conceded it should not have been assessing the 3% federal telephone excise tax on most long-distance calls that are billed based on elapsed time or for bundled service when local and long-distance services are combined. This excise tax was charged on land lines and cell phone plans.

Taxpayers, who paid this incorrectly charged excise tax, can request refunds for taxes wrongfully paid in services billed after 2/28/03 and before 8/1/06. This 41-month time frame is called the “relevant period”. This refund can only be requested on your 2006 federal income tax returns.

In November 2006, the IRS announced it will give businesses and tax-exempt organizations the option of using a simplified formula approach to calculate their federal telephone excise tax refund amounts. The businesses must complete new Form 8913 (Credit for Federal Telephone Excise Tax Paid) and then claim the refund amount as a tax credit on the applicable 2006 federal income tax return.

How the Formula Works.

Step 1: Take the April 2006 phone bill; divide the total federal telephone excise tax amount by the total phone bill amount to arrive at the percentage of that bill attributable to the tax. If you had several phone service providers (e.g., for land-line and a cell phone), combine all the April bills when making this calculation.

Step 2: Take the September 2006 phone bill and divide the total federal telephone excise tax by the total phone bill to arrive at the percentage of that bill attributable to the tax. The percentage should be lower than the percentage calculated in Step 1 because in September 2006, the government was only collecting the tax on local phone service charges.

Step 3: Subtract percentage calculated in Step 2 from the percentage calculated in Step 1 to arrive at the percentage of the phone bill attributable to the tax. Let’s call this the “refund percentage”. However, the refund percentage is capped at 2% for small businesses (those with 250 or fewer employees).

Step 4: Multiply the percentage calculated in Step 3 by the total telephone bills/expense amount (including federal excise taxes) shown on phone bills with dates falling within the 41-month period (i.e., bills with dates after 2/28/03, but before 8/1/06). The result of this multiplication is an estimate of the percentage of phone charges attributable to wrongfully paid taxes.

We recommend that you use the formula method in order to calculate the telephone excise tax refund. To assist you in this matter, please provide us with a worksheet showing the monthly phone bills for the 41-month period (bills after 2/28/03, but before 8/1/06).

To help you evaluate the dollar benefit of this tax credit, use an estimated refund percentage of .5% (0.005) times the estimated total of your phone bills during the 41-month period. You may determine the tax credit is not large enough for the work and effort involved to obtain the resulting refund amount.

Please provide this information by February 15, 2007 in order to calculate it into your 2006 income tax return. If you have questions, please call (816) 353-2242.

The information contained on this site should in no way be considered to be professional advice in the form of either tax, accounting, or legal service or consultation. You should always consult with a professional familiar with your individual circumstances before making any specific decisions related to accounting, tax, or legal matters.