Problems Arise with Federal Excise Tax Refund and Some Long-Distance Customers, VSCPA Reports

February 2, 2007

The U.S. Internal Revenue Service (IRS) requests that the Virginia Society of CPAs (VSCPA) alert CPAs to an issue that could affect how federal excise tax refunds are calculated for businesses and nonprofits — potentially altering tax returns.

New information reveals that some telephone service providers continued to charge customers the excise tax on long-distance services several months later than mandated by the federal government.

Excise Tax Refund Background

On August 1, 2006, telephone companies were instructed by the IRS to stop collecting the excise tax on long distance services. First imposed in 1898, the 3 percent excise tax was removed after five federal appeals courts ruled that the tax no longer applied to long-distance service as it was currently billed.

Last May, the IRS announced that any individual, business or nonprofit who paid the federal excise tax between February 28, 2003, and August 1, 2006, is entitled to a refund. The tax refund is available to anyone who paid the excise tax on landline, wireless or Voice over Internet Protocol (VoIP) service. In addition, interest will be paid on the refunds.

To receive the refund, taxpayers must base their refund requests on the actual amount of tax paid. To do this, they must fill out Form 8913 (.PDF), Credit for Federal Telephone Excise Tax Paid. To eliminate the need for taxpayers to sift through 41 months of old phone bills, the IRS created a standard amount, from $30 to $60 for individuals, based on an exemption scale.

On November 16, 2006, the IRS issued IR-2006-179, announcing a formula calculation for businesses and nonprofits to estimate federal excise tax refunds. The method allows comparison of the April 2006 telephone bill (which includes the tax) and the September 2006 bill (which should exclude the tax).

Problems with Telephone Service Providers

It has come to the attention of the VSCPA that some telephone service providers continued to charge customers the excise tax on long distance services through the end of December 2006, rather than the August 1, 2006, cut-off date. Therefore, tax practitioners will have a difficult time calculating the appropriate refunds for their clients.

If practitioners try to follow IRS guidance IR-2006-179 for short-method calculation for businesses and nonprofits, the refund sum will be incorrect because the September 2006 bill will include, rather than exclude, the tax.

The VSCPA has contacted the IRS, and the IRS is currently working to address the issue. The IRS hopes to issue either amended guidance or other written information to allow business and tax-exempt organizations to correctly calculate the refund amount within a short period of time.

New guidance will hopefully eliminate the need to pull 41 months of telephone bills to calculate the correct refund.

The VSCPA will immediately notify you when the new IRS guidance is available. More information on the tax refund, including how the refund is calculated, is available online on the IRS Web site.

Please watch VSCPA communications and the VSCPA Web site for updates. If you have any questions, contact VSCPA Government Affairs Director Erin Collins at (800) 733-8272.