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Article:
Are you entitle to a Phone Excise Tax
Refunds?
In late May, the IRS threw
in the towel and conceded it should not
have been assessing the 3% federal telephone
excise tax, under IRC Sec. 4251, for most
long-distance calls. This followed an
embarrassing string of losses in the courts,
which finally became tiresome even to
the government.
Specifically, in Notice 2006-50, the IRS
admitted the tax doesn't apply to long-distance
calls for which charges are based on elapsed
time (e.g., charges based on a fixed per-minute
rate that doesn't depend on the distance
of the call). Surprisingly, Notice 2006-50
also exempts "bundled services"
from the tax. Bundled services mean when
local and long-distance services are combined
under a plan that does not separately
charge for local services. For example,
bundled services include: (1) land line
and cell phone plans that combine local
and long-distance services for a flat
monthly fee or for a charge that varies
with total minutes used, (2) prepaid phone
cards, and (3) Voice Over Internet Protocol
(VOIP) service.
Note:?The Section 4251 excise tax continues
to apply to separately-stated local phone
service charges.
Taxpayers, or outfits that collected the
Section 4251 excise tax, such as phone
companies, can request refunds for taxes
paid on nontaxable services (as defined
above) that were billed after 2/28/03
and before 8/1/06. This 41-month time
frame is called the "relevant period"
in Notice 2006-50. Refunds are expected
to amount to about $13 billion.
How
to Obtain Refunds?
Pursuant
to Notice 2006-50, taxpayers can request
credits or refunds of excise tax amounts
billed during the relevant period for
nontaxable services only on their 2006
federal income tax returns. This means
calendar-year 2006 returns and returns
for fiscal tax years that begin in 2006
and include 12/31/06. The IRS will provide
guidance on claiming refunds in instructions
to 2006 tax forms. Taxpayers that are
not otherwise required to file returns
(e.g., individuals with modest incomes)
must file returns in order to claim their
rightful phone tax refunds.
Observation:?Under this refund procedure,
taxpayers with fiscal tax years may have
to wait a distressingly long time to get
their money back. For example, an entity
with a 2006 tax year that begins on 10/1/06
may not be able to file its return for
that year until sometime in 2008. Rats!
Substantiation Rules
To be entitled to a refund, taxpayers
must certify that they: (1) have not already
received a credit or refund from their
collector and (2) will not ask their collector
for a credit or refund (and that they
have withdrawn any previously submitted
request for a credit or refund, if applicable).
As a general rule, taxpayers must retain
records that substantiate their refund
requests (e.g., phone bills showing excise
tax amounts that were charged for nontaxable
services during the relevant period and
evidence that the bills were paid). However,
as explained next, individual taxpayers
are allowed to claim "safe-harbor"
refund amounts without any documentation.
Note:?In News Release IR-2006-37 (dated
8/31/06), the IRS said it is looking for
ways to make the refund process easier
for non-individual taxpayers
Simplified Safe-harbor Refund Rules for
Individuals
In New Release IR-2006-37, the IRS announced
standard excise tax refund amounts that
individuals can claim, without having
any documentation, when filing 2006 Forms
1040. The standard amounts are as follows:
" $30 for an individual filing a
return with one exemption.
" $40 for two exemptions.
" $50 for three exemptions.
" $60 for four or more exemptions.
Claiming the applicable standard refund
amount allows the taxpayer to avoid the
chore of sifting through 41 months worth
of phone bills.
In addition, the IRS is designing new
Form 1040EZ-T, which can be used for refund
claims by individuals who are not otherwise
required to file Form 1040.
Note:?Individuals still have the option
of figuring their refund amounts based
on actual taxes billed for nontaxable
services during the relevant period. Also,
the IRS has stated that there will be
no safe harbor for entities other than
individuals. However, they are considering
ways to make this refund process easier
for these taxpayers.
Federal
Income Tax Treatment of Refunds and Related
Interest
Any part of a credit or refund that is
attributable to excise tax amounts that
were previously deducted as business expenses
[including amounts deducted in calculating
unrelated business taxable income (UBTI)]
must be included in the taxpayer's income
for the tax year in which the refund is
received or accrued-to the extent the
previously deducted excise tax amounts
actually reduced the taxpayer's federal
income tax bill (or UBTI tax bill).
Any interest received on credit or refund
amounts must be included in income on
the return for the tax year in which it
is received or accrued. For most individual
taxpayers, this means such interest will
have to be reported in their calendar-year
2007 returns.
Any excise tax credit or refund amount
that is included in the income of a partnership
or S corporation (including any related
interest) must be reported on the entity's
return for the tax year in which the amount
is received or accrued, and the amount
must be allocated (passed through) to
the partners or shareholders on their
Schedules K-1 for that year.
According to Notice 2006-50, the credit
or refund amount doesn't count as a credit
against tax for purposes of the estimated
tax rules under IRC Secs. 6654 and 6655.
Therefore, taxpayers cannot take such
credit or refund amounts into account
when determining their 2006 estimated
tax payments. In determining 2007 estimated
tax payments, income attributable to credits
or refunds must be taken into account:
(1) on the date it is paid or credited
for a cash-method taxpayer or (2) on the
filing date of the return that includes
the refund request for an accrual-method
taxpayer.
Rules
for Excise Tax Collectors
A taxpayer that collects the excise tax,
such as a phone company, can make a credit
or refund request for taxes collected
on nontaxable services only if it can
establish that: (1) the requested amounts
have been repaid to phone service customers
or (2) that phone service customers from
whom the taxes were collected have given
the collector written consent to request
the credit or refund amounts.
What about Taxes Improperly Charged for
Nontaxable Services after 7/31/06?
Good question. According to Notice 2006-50,
the IRS will deny taxpayer requests for
refunds of excise tax amounts that are
improperly billed after 7/31/06 for nontaxable
phone services. Instead, affected taxpayers
should seek repayment of improperly charged
taxes from the collector.
Conclusions
For individuals, the refund process will
be simple, unless they want to calculate
the actual amount they paid. Individuals
not opting for the safe harbor and business
not reported along with Form 1040s (on
Schedules C and F) will need to pull out
all 41 months worth of phone bills and
start adding, unless the IRS comes up
with a better alternative. For those with
large phone bills, however, it may be
best to go ahead and get started.
References:
IRC Sec. 4251.
Notice 2006-50, 2006-25 IRB 1141.
IRS News Release IR-2006-37.
Copyright
© 2006 Practitioners Publishing Company.
All Rights Reserved. Practitioners Tax
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Article:
Business
Valuations: A Timely Prescription
New
Rules for IRA's Present Opportunities
for Retirement Planning
The
IRS has issued new rules governing IRA
required minimum distributions (RMD's),
which should benefit most, although not
all, taxpayers as they approach retirement
age. These new rules simplify and standardize
the way lifetime minimum distributions
are determined, simplify payouts of account
balances to beneficiaries after death,
change the time by which a beneficiary
must be named, and clarify how trusts
are to be treated when designated as account
beneficiaries.
Below
are the most significant effects of the
new rules:
•
If you are already receiving required
minimum distributions from an IRA, it
is very possible that the new rules will
reduce your required distribution by 20%
or more. This would allow you to take
advantage of a slower overall distribution
and continuing deferral of taxes.
•
Rules for post-death distributions have
been greatly simplified. Under the new
rules the distribution period is simply
the life expectancy of the designated
beneficiary. If distributions have already
begun and there is no designated beneficiary,
the account balance is paid out over the
remaining life expectancy of the owner.
If distributions have not yet begun and
no beneficiary is designated, the account
balance must be distributed within five
years of the owner's death.
•
The new rules provide that a beneficiary
need not be designated for an account
until the end of the year following the
Owner's death. This allows a great deal
of flexibility in extending the time over
which beneficiaries can take distributions
from the account. Under the old rules,
beneficiaries had to be designated prior
to the account's required beginning date
or the date of the Owner's death, whichever
came first, and the rate of distribution
generally could not be changed even if
the beneficiary died or there were other
changes in estate-planning considerations.
•
The new rules clarify that a surviving
spouse, assuming said spouse is the sole
beneficiary of the IRA, can be designated
as the Owner of the account, with an unlimited
right to withdraw.
•
One situation that is more restrictive
and requires immediate examination of
your estate plan is if a spousal trust
is named as the sole beneficiary. Even
if the surviving spouse is the sole beneficiary
of the trust, Ownership of the account
cannot be assumed in this situation, limiting
the planning options available.
•
Another potential downside to the new
rules is that the simplification will
make it easier for the IRS to identify
and enforce the imposition of a 50% excise
task on account owners who fail to take
their required minimum distributions within
a given year.
To
obtain a copy of our brochure on the subject,
to find out more about how these new rules
will effect you, or to have your estate
and retirement plans reviewed by one of
our expert consultants, please contact
us at [email protected].
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