Claim the Telephone Tax Refund on your 2006 Tax Return

If you’ve made a phone call in the last four years, you are probably eligible Highlights • One-time credit on 2006 federal income tax return • Standard $30 to $60 refund for qualifying individuals — or claim actual amount paid • Eligibility based on making a long distance call or having a bundled phone service • Available even if no tax return filed or no taxes owed • Business and nonprofit organizations also eligible; filing rules vary • Only applies to specific excise tax; not other phone taxes or fees Background This story begins back in 1898, when the U.S. government needed a way to fund the SpanishAmerican War. One solution to raise revenues was to implement an excise tax on the use of a luxury item of the day — a fairly new technology called the telephone. In one form or another, the excise tax has been around for most of the time since that conflict. The modern tax rate of 3%, on most local and long distance phone services, was collected until the summer of 2006; it is now only collected on local phone service. Repeal This may surprise anyone under 35 years old, but the per-minute rate for domestic long distance calls used to vary by the distance the call traveled. For example, someone living in New York would pay more to call Los Angeles than to call Cleveland. This zone form of pricing went away as competition increased in the long distance industry, and with the advent of digital technologies that eliminated most of the carriers’ distance-related costs associated with connecting a long distance call. For long distance, only those calls priced differently by distance were supposed to be charged excise tax. Since consumers and businesses were no longer being billed that way, the IRS was challenged in court over why the tax was still being collected. After losing several times, the tax agency announced last summer that the tax would no longer be collected on bundled plans or long distance calls. Refund The IRS will refund excise taxes on long distance or bundled services billed after February 28, 2003 and before August 1, 2006. Any individual, business or nonprofit organization that paid the tax during that period is eligible for a refund if claimed on their 2006 return or, if no return is required, on a new form created for this purpose. Tax billed before February 28, 2003 is not eligible for credit due to the statue of limitations in the tax code.

Eligibility If you made any long distance calls or had a bundled telephone plan during the above-referenced period and received a monthly bill, you were automatically charged excise tax by your phone company, and you are eligible to claim the refund. Note that bundled services include local + long distance packages on your home phone, as well as just about any cellular or VoIP phone plan. Bottom line — unless you only made local phone calls from your home phone during this period, you are probably eligible for a refund. Amount To paraphrase an often-used line, “we can do this the easy way or the hard way”. The easier approach is to take the standard credit calculated by the IRS. It is based on the number of exemptions claimed on your tax return. The credit is $30 for one exemption, $40 for two, $50 for three, and $60 for four or more. So a married couple with two dependent children, filing jointly, could claim a $60 refund. Since this is a credit, it is a dollar-for-dollar reduction in your tax bill (or increase to your refund check). The more difficult approach requires you to locate all of your phone bills from the eligibility period (41 months) and calculate the actual amount of excise taxes you’ve paid. Your phone company is not required to provide copies of these to you. It is quite possible that the credit calculated based on actual excise taxes paid will be somewhat higher than the standard credit offered by the IRS. You may fall into this category if you had high long distance or wireless bills, or if you had multiple telephone lines. You’ll even earn interest on the credit when you base it on your actual bills. However, for many people, it will be more trouble than it is worth to locate and analyze all those old phone bills. Businesses also have two ways to calculate the credit. Like consumers, they can calculate the actual tax paid by reviewing their past bills. Alternately, they can use an IRS formula that uses two phone bills from 2006 and the number of employees on the payroll. Claim Fill in the credit directly on your 2006 Form 1040 (line 71), Form 1040A (line 42), or Form 1040EZ (line 9). If you don’t need to file a 2006 return, complete Form 1040EZ-T to request the refund. Note that in all cases, if you are claiming a credit for actual excise taxes paid, you must also complete Form 8913, “Credit for Federal Telephone Excise Tax Paid.” Most businesses will also complete Form 8913, along with their normal business tax return. Do not claim the credit for taxes other than the specific federal excise tax addressed here. Excise taxes related to local phone service plans, fees such as universal service or subscriber line charges, and all federal, state and local taxes are not eligible. Only one standard credit is allowed per tax return, regardless of the number of telephone lines on which eligible excise tax was paid.

Disclaimer The preceding is an overview of an IRS program to refund certain excise taxes paid. It is not tax advice, and should not be relied on as such. Those that believe they are eligible should contact their tax advisor for more information.