The IRS recently threw in the towel on a tax that has been a point of contention for years. In a new series of pronouncements, the IRS conceded that long-distance telephone charges should not be subject to federal income tax. Bowing under the weight of public pressure and recent setbacks in court cases, the IRS announced that it will stop collecting the 3 percent excise tax on long-distance services. (IRS Notice 2006-50)
    The tax was originally imposed in the late 1800s to help finance the Spanish-American War. Now, more than 100 years later, the IRS announced that it will issue credits or refunds of all excise taxes paid on long-distance service billed after February 28, 2003 — plus interest. The IRS noted that decisions in five federal appeals courts have held "the tax does not apply to long-distance service as it is billed today."
    Some of the key points of the new IRS policy:
     Both long-distance service and "bundled" service (such as local and long-distance service provided under the same charge) are not taxable. As a result, taxpayers are no longer required to pay tax for long distance services. However, the tax will continue to be collected on local-only service charges.
     Collectors or taxpayers may request a refund of tax paid for any nontaxable service that was billed after February 28, 2003, and before August 1, 2006.
     The IRS has directed collectors to stop collecting and paying over tax for nontaxable services billed after July 31, 2006. Consequently, the IRS will deny refund requests on nontaxable services billed after July 31, 2006. Such requests should be directed to the collector.
     Taxpayers may request a credit or tax refund only on their 2006 federal tax returns. The new IRS Notice also provides guidance for credits or refunds to partnerships, S corps, estates and trusts, tax-exempt organizations, corporations and other non-filing entities.
    Finally, the IRS is still working on the exact procedures and forms for refunds, including the possible creation of a "safe harbor" amount. "Taxpayers won’t have to spend time digging through old telephone bills," said IRS Commissioner Mark W. Everson. "Claiming a refund will be simple and fair."
    We expect to have more details on this new tax break shortly and will report them to you.