Jacob M. Leon, CPA/PFS CFP^®

IRS has announced the standard amounts (ranging from $30 to $60) that individual long-distance customers can use to compute their telephone excise tax refund under the safe harbor method provided by IRS. To use the standard amount, most taxpayers will only have to fill out one line on their regular 2006 return.  As further clarified in Telephone Tax Refund Questions and Answers on IRS's web page, taxpayers don't need to itemize to claim this refund.

Background. IRS conceded that telephone communications for which a toll charge varied only with elapsed time, and not distance, wasn't taxable. Accordingly, taxpayers or collectors of the tax could request a credit or refund of amounts paid for service that was billed to taxpayers after February 28, 2003, and before August 1, 2006 (“the relevant period”), but only on their 2006 income tax returns (the income tax return for calendar year 2006 or the first tax year including December 31, 2006). IRS is creating a special short form (Form 1040EZ-T) for individuals who don't need to file a regular return.

Individuals (including Schedule C filers), but not other taxpayers, may request a refund or credit using either the actual amount of tax paid for nontaxable services or the safe harbor amount. Individuals using the safe harbor amount aren't required to submit or keep any documentation to support their refund request. To use the safe harbor amount, individuals must:

1. have paid all taxes billed by their service provider after February 28, 2003, and before August 1, 2006;

2. have not received a credit or refund of these taxes from the service provider, and

3. either have not requested a credit or refund from the service provider or have withdrawn any such request.

Observation: Taxpayers not using the safe harbor amount must be able to substantiate their refund claim. For example, they must have bills showing the tax charged for nontaxable services for each month and receipts, canceled checks, or other evidence that the tax was actually paid.

Standard telephone excise tax refund under safe harbor. IIRS announceD that the standard amounts for telephone excise tax refunds under the safe harbor will range from $30 to $60. 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; and

•  $60 for a person filing a return with four or more exemptions.

Illustration: A married couple file a joint return with two dependent children (for a total of four exemptions). They are eligible for the maximum standard amount of $60.

Observation: As explained in “ Telephone Tax Refund Questions and Answers” on IRS's web page, taxpayers won't get the telephone tax refund in a separate check. The refund will be treated as a one-time payment on a taxpayer's 2006 return. It will reduce the amount that a taxpayer otherwise owes on his return or increase the amount of his refund.

IRS says that the standard amounts are based on actual telephone usage data, and that the standard amount applicable to a family or other household reflects the long-distance phone tax paid by similarly sized families or households.

IRS Commissioner Mark W. Everson emphasizes that this is the easiest way to get a telephone excise tax refund. “These amounts save taxpayers from locating 41 months of old phone bills and analyzing these bills to determine the taxes paid,” he said.

Possible relief for businesses. Businesses and nonprofits can't use the safe harbor method and must base their telephone tax refund on the actual amount of tax paid. However, IRS says that it is looking into reasonable methods for estimating the telephone excise tax refund amounts to make the refund process easier for these taxpayers.

See our article titled Businesses - Telephone Tax Refund for rates for businesses and non-exempts.

    For more information on how these changes may affect your tax situation

call me at 713-333-7477

or email me at jacob@thefinancialfirm.com

 

Any discussion pertaining to taxes in our web site (www.thefinancialfirm.com) may be part of a promotion or marketing effort. As provided for in circular 230 of the IRS, advice related to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.

Posted 9/27/06

    Revised 12/4/06