The federal government has decided to refund the long-distance telephone excise tax through the taxpayers’ 2006 tax returns. This is leading towards increased complexity in preparing the 2006 returns next tax season.

Background - As a result of several tax court rulings, the IRS announced in May 2006 that it will stop collecting the federal 3% excise tax on long-distance telephone service. In addition, taxpayers will be able to claim a refund of the excise tax billed to them on their telephone bills after February 28, 2003 on their 2006 tax returns.

Originally, the IRS had indicated it would develop a simplified method. However, nothing such as this is ever that simple. It appears the rebate will be a little more complicated than originally envisioned;

o The IRS is developing a 1040PC-2 to be used by taxpayers who are not otherwise required to file a return and are filing for the rebate only.

o For those taxpayers who do not have a business phone, then a simplified method is being developed for the rebate.

o For those with business phones, the actual amount of the excise tax must be determined for the rebate purpose. Thus, business returns (including Schedule C returns) must base their rebate on actual excise tax changes from the phone bills. And since the excise tax was originally deducted as a business expense (it was included in the phone expense deduction), the rebate will be taxable income in the subsequent year.

If you have a business, you will need to determine the actual excise tax paid on long-distance calls. You may use the attached worksheet to pull the information together. You are encouraged to take action now, so that your tax appointment is not hampered or your tax returns delayed by this one-year anomaly. Please call if you have questions or need assistance.