Telephone Tax Refunds: Questions and Answers for Businesses and Tax-Exempt Organizations
Are businesses required to dig through all their old phone records to figure their telephone tax refund?
No. The IRS has developed a formula that most businesses and tax-exempt organizations can use to figure their refund. To use the formula, eligible taxpayers need only review their phone bills for 2 months (April and September 2006 bills), instead of all 41 months included in the refund period. In addition, eligible taxpayers need to know the number of employees reported on their federal withholding tax return (Form 941, Employer’s Quarterly Federal Tax Return) for the second quarter of 2006 and their total telephone expenses for the 41-month period.
Total telephone expenses means all amounts paid to every telecommunications provider used by the eligible entity for telephone service that were billed after February 28, 2003, and before August 1, 2006. These amounts include, but are not limited to, amounts paid for long distance service, local-only service, bundled service, 900 number service, universal service fees, federal, state, and local taxes. If an eligible entity is billed for telephone and non-telephone services on one bill each month and does not separately track non-telephone services in its books and records, the entire amount of that bill is included in total telephone expenses. An eligible entity may determine the amount of its total telephone expenses by examining its books and records, including, for example, its general ledger, check register and canceled checks.
The formula is an alternative to basing a refund request on the actual amount of tax paid. All taxpayers have the option of requesting a refund of the actual amount of tax paid.
Whether they use the formula or request a refund of actual taxes paid, businesses and tax-exempt organizations must use Form 8913, Credit for Federal Telephone Excise Tax Paid, to request the refund. Businesses attach this form to their regular 2006 income tax returns. Tax-exempt organizations should attach the 8913 to Form 990-T, Exempt Organization Business Income Tax Return.
Who can use the formula?
In general, businesses and tax-exempt organizations that were operating at any time during the period from March 1, 2003, through July 31, 2006, and continued to incur phone expenses from April 2006 through September 2006, may use the formula. This includes corporations, S corporations, partnerships, trusts and estates. (Trusts and estates are treated as businesses in applying the formula.) Nonprofit tax-exempt organizations, including churches and charities, can also use the formula.
In addition, individual owners of rental property and self-employed people, including independent contractors, sole proprietors and farmers, can use the formula, but only if they report gross rental and business income totaling more than $25,000 on their 2006 federal income tax returns. This is the amount shown as:
- Gross income on Schedule C, Line 7,
- Gross receipts on Schedule C-EZ, Line 1,
- Rents received on Schedule E, Line 3, and
- Gross income on Schedule F, Line 11.
Individual or joint filers who fill out multiple schedules and have aggregate gross rental and business income above $25,000 may use the estimation formula.
How does the formula work?
To use the formula, businesses and tax-exempt organizations follow these steps:
- Take the April 2006 phone bill (this is the bill with an April 2006 statement date) and divide the total federal telephone excise tax by the total phone bill (including federal telephone excise taxes) to arrive at the percentage of the bill attributable to federal telephone excise tax. If you have more than one type of service or service provider (land line, fax, cell, local, long distance, bundled, etc.), combine all bills dated in April before making this computation. For this purpose, there is no need to separate the taxes paid on long-distance service from those paid on local service. April is a representative month during which the government was still collecting the excise tax on long-distance service.
- Take the September 2006 phone bill and divide the total federal excise tax by the total phone bill to arrive at the percentage of that bill attributable to federal telephone excise tax. Combine all bills dated in September before making this computation.The percentage should be lower because the government was only collecting the federal excise tax on local telephone service.
- Subtract the September percentage from the April percentage to arrive at the percentage that represents the federal long-distance tax. This is the percentage businesses and tax-exempt organizations will use to figure their refunds (capped as discussed below).
- Multiply the long-distance tax percentage by the total phone expenses shown on telephone bills dated after Feb. 28, 2003, and before Aug. 1, 2006. The refund is capped at 2 percent of phone expenses for small businesses (those with 250 or fewer employees) and one percent for large businesses (those with more than 250 employees). Use the number of employees for the pay period that included June 12, 2006. This is the number reported on Line 1, Form 941 (Employer’s Quarterly Federal Tax Return) for the second calendar quarter of 2006. Interest is added to the refund amount.
You can use the formula, even if your organization or business only operated for part of the 41-month period. However, if you were not in business or operating April through September 2006, you cannot use the formula. You can only request a refund for months for which the telephone tax was paid.
I qualify to use the formula, but my telephone expense records are not broken down by month. Is there an acceptable method for me to estimate my telephone expenses for the 41-month refund period?
Yes. You can base your estimate on the amounts you reported as business-related telephone expense on your returns for tax years 2003 through 2006 (i.e., taxpayers may determine the amount of total telephone expenses by examining their books and records, including, for example, their general ledger, check register, and canceled checks). Prorate the telephone expense amount for a particular tax year if part of the year falls outside the refund period (2003 and 2006 for most taxpayers). Note that you still need your telephone bills for April and September of 2006 to use the formula.
(i) Facts: Business A has 250 employees. A’s April 2006 telephone bill is $1,700, including federal communications excise tax of $47.60. A’s September 2006 telephone bill is $1,600, including federal communications excise tax of $24.00. A’s total telephone expenses, for which it does not have monthly records, are as follows:
2003 — $10,800.00
2004 — $16,000.00
2005 — $20,000.00
2006 — $20,571.37
(ii) Determining the April and September percentages: A’s April percentage is 2.8 percent (47.60 ÷ 1,700). A’s September percentage is 1.5 percent (24 ÷ 1,600).
(iii) Determining the FETP: The difference between A’s April percentage and September percentage is 1.3 percent (2.8 - 1.5). Thus, the FETP is 1.3 percent.
(iv) Capping the FETP: Because A’s number of employees does not exceed 250, A’s FETP is not capped at 1 percent.
(v) Prorating: Because A did not maintain its total telephone expense records by month, it prorates those amounts equally to each month within the March 2003-July 2006 period for each particular year. For 2003, A divides its total telephone expense of $10,800 by 12 and multiplies that result by 10 (the number of months between March and December). ([10,800 ÷ 12] x 10 = 9,000.) For 2006, A divides its total telephone expense of $20,571.37 by 12 and multiplies that result by 7 (the number of months between January and July). ([20,571.37 ÷ 12] x 7 = 12,000.)
(vi) Calculating the amount of the credit or refund: Using the EM, the amount of A’s credit or refund is calculated as follows:
2003 — $9,000 x .013 = $117 (117÷10 = 11.7) Monthly amount is $11.70.
2004 — $16,000 x .013 = $208 (208÷12 = 17.33) Monthly amount is $17.33.
2005 — $20,000 x .013 = $260 (260÷12 = 21.67) Monthly amount is $21.67.
2006 — $12,000 x .013 = $156 (156÷7 = 22.29) Monthly amount is $22.29.
(vii) Reporting the credit or refund amounts on Form 8913: (A) Because the credit or refund period does not align with the calendar quarters, Form 8913 requires taxpayers to report the credit or refund amounts in 13 three-month intervals and one two-month interval. Thus, A would report credit or refund amounts on Form 8913 as follows:
March, April, May 2003 — $35.10 (11.70 x 3 = 35.10)
June, July, August 2003 — $35.10 (11.70 x 3 = 35.10)
September, October, November 2003 — $35.10 (11.70 x 3 = 35.10)
December 2003, January, February 2004 — $46.36 (11.70 + [17.33 x 2] = 46.36)
March, April, May 2004 — $51.99 (17.33 x 3 = 51.99)
June, July, August 2004 — $51.99 (17.33 x 3 = 51.99)
September, October, November 2004 — $51.99 (17.33 x 3 = 51.99)
December 2004, January, February 2005 — $60.67 (17.33 + [21.67 x 2] = 60.67)
March, April, May 2005 — $ 65.01 (21.67 x 3 = 65.01)
June, July, August 2005 — $65.01 (21.67 x 3 = 65.01)
September, October, November 2005 — $65.01 (21.67 x 3 = 65.01)
December 2005, January, February 2006 — $66.25 (21.67 + [22.29 x 2] = 66.25)
March, April, May 2006 — $66.87 (22.29 x 3 = 66.87)
June, July 2006 — $44.58 (22.29 x 2 = 44.58)
After determining the amount of credit or refund using the EM, A reports the amounts on Form 8913, and attaches the Form 8913 to A’s 2006 federal income tax return.
The same facts as Example 1, except that A has 500 employees. A’s FETP is capped at 1 percent. Thus, A must make the same calculation as in Example 1 to determine the proper amount of A’s credit or refund of federal communications excise tax using the FETP of 1 percent, rather than 1.3 percent.
Note: For reporting purposes, telephone taxes need to be allocated by month or quarter. See Form 8913 and its instructions for more information.
Which cap should a business or nonprofit use if its number of employees is 250 or less for part of 2006 and more than 250 for the rest of the year?
The cap is determined based on the number of employees for the pay period that includes June 12, 2006. This is the number reported on Line 1, Form 941. Thus, employment levels at other times of the year have no impact.
In applying the percentage cap, are part-time employees considered the same as full-time employees?
Yes. Use the number of employees reported on Line 1 of Form 941 for the second quarter of 2006. This figure includes both full-time and part-time employees. It does not include household employees, employees who received no pay, pensioners and active members of the armed forces.
Are there any additional forms required to use the formula?
No. All businesses and tax-exempt telephone tax refund requests must be made using Form 8913, Credit for Federal Telephone Excise Tax Paid. No additional forms are needed to use the formula.
Does an eligible entity have to use the formula?
No. The formula was designed to make it easier for businesses and tax-exempt organizations to request a refund of the telephone tax paid on long-distance and bundled telephone charges billed after Feb. 28, 2003, and before Aug. 1, 2006. It is optional.
Does the IRS plan to audit telephone tax refund requests?
The IRS expects to treat telephone tax refund requests in a manner similar to other tax returns. In general, the IRS accepts most federal tax returns as filed. However, to make sure taxpayers are following the law, the agency examines or audits some returns.
Returns are audited for a variety of reasons, and most are chosen by computerized screening.
In case of audit, what records should businesses and tax-exempt organizations keep?
If you use the estimation formula, the IRS suggests that you keep the following records:
- Copies of your phone bills dated in April and September 2006,
- Your business-related telephone expenses for the 41 months for which the refund is available (March 2003 through July 2006), and
- Documentation that confirms the number of employees during the pay period that included June 12, 2006, as reported on Line 1, Form 941 (Employer’s Quarterly Federal Tax Return) for the second quarter of 2006.
If you base your refund request on the actual amount of tax paid, keep copies of your telephone bills for the months for which you requested a refund.
Either way, do not send these documents with your refund request — keep them for your records.
Are foreign businesses and tax-exempt organizations eligible to request the telephone tax refund?
Yes. Like other taxpayers, they are eligible to request the refund if they paid federal excise taxes on long-distance charges billed after Feb. 28, 2003, and before Aug. 1, 2006.
Can businesses and tax-exempt organizations figure their refunds using the actual amount of tax incurred for one year and use the formula for taxes incurred in another year?
No. Businesses and tax-exempt organizations can choose either method but not both.
If a taxpayer owns more than one business, does the taxpayer submit a separate refund request for each business?
In some cases, yes. It depends upon whether each business is considered a separate business for tax purposes.
Each business that has an employer identification number (EIN) with the IRS (for example, two corporations owned by the same taxpayer) is considered a separate business for tax purposes and can request a telephone tax refund. Each separate business can choose to figure its refund using either the formula or the actual amount of tax paid. Individuals who operate more than one business as a sole proprietor are issued only one EIN. Thus, an individual can submit only one refund request.
Can the IRS use telephone tax refunds to offset tax debts?
Yes. Like other tax refunds, the telephone tax refund can be applied against other taxes owed by the taxpayer.
I am requesting the telephone tax refund on my 2006 business return, and I expect to receive my refund in 2007. Do I have to report it as income on my 2007 return?
Generally, yes. Normally, a business taxpayer can deduct the cost of telephone service, including related taxes. Thus, if you later receive a refund of those taxes, you normally must include it, along with any related interest, in your gross income in the year you receive it.
Further details on reporting these refunds will be included in IRS publications and tax instructions for 2007.
Why can't the telephone companies pull the information from their databases and provide it to businesses?
Many service providers lack easy access to records for the entire 41-month period. In general, they retain about six months of records on-line. In addition, many taxpayers have more than one service provider or have changed providers at least once in the past three years. Thus, the telephone companies cannot provide complete records for all of their customers.
The estimation formula was created to save time and trouble for businesses and tax-exempts requesting refunds and help limit the volume of customer record requests to companies in the telecommunications industry. Those wishing to base their requests on actual taxes paid and who lack adequate records, may, in some cases, be able to obtain records from their service provider. However, service providers are not precluded from charging customers for providing these records, and customers making these requests may face substantial delays in obtaining them.
Why can't the IRS figure the telephone tax refund and send it to each eligible business or tax-exempt organization?
Telecommunication services providers collected the tax from their customers based on long-distance charges billed. Therefore, the IRS does not have access to all of the information needed to figure these refunds.
How will the IRS provide the forms and other information needed by businesses?
Details on the telephone tax refund will be included in all 2006 tax return materials and on this Web site.
If a business or tax-exempt organization does not have 41 months of documentation, what are its options?
Businesses and tax-exempt organizations need their phone bills dated in April 2006 and September 2006 to figure their long-distance tax percentage for their refund requests. If a business or tax-exempt organization has its expenses broken out by month, all it has to do is add them together in the groups shown on Form 8913, Credit for Federal Telephone Excise Tax Paid. For example, it can add its March, April and May 2003 expenses together to obtain the total amount of telephone expenses it had for this time period.
If it does not have its expenses by month, it can estimate the amount for each time period on the Form 8913 by using the average monthly phone expense for each year included in the 41-month refund period.
For example, it divides its total telephone expense for 2003 by 12 to get a monthly average. It uses this amount to estimate the amount of telephone expense it incurred for each of the time periods in 2003 shown in column D of Form 8913. It can repeat this step for each subsequent year.
My companies file a consolidated return. Some of the companies have less than 250 employees and others have more than 250 employees. We want to use the estimation method. When determining the number of employees, do we use the aggregate number of employees?
Yes, when determining the number of employees, companies should aggregate the number of their employees for the estimation method.
My company uses several vendors for phone service. Can I use the estimation method for some of the vendors and the actual amounts for others?
No. If you choose the estimation method, you must use that method to determine the refund amount for all of the company’s vendors.
Who do I contact for more assistance?
Call the IRS Business and Specialty Tax Help Line at 1-800-829-4933. If you press 7, you will get a recording that explains how to request the telephone excise tax refund. If you want to talk with a tax assistor, follow these menu prompts.
First, press 1 for English or 2 for Spanish.
Next, press 3: “If you have not heard your topic.”
Next, press 2: “If you have questions about preparing or filing a return.”
Then press 1: “If you have questions about the telephone excise tax refund.”
Finally, press 1: “Corporations, partnerships, trusts and tax-exempt organizations.”