Many Firms Failed to Claim 'Telephone Tax' Refund

A recent study from a government inspector general adds merit to the complaint long held by the small business community that onerous and complicated rules are putting micro firms at a disadvantage.

The report by the Treasury Inspector General for Tax Administration said the IRS's recent effort to refund to individuals and businesses what's called the "telephone excise tax" was a success, but a huge amount of money has gone unclaimed and unrefunded. Many of those foregoing what was essentially "free money" were small businesses.

A survey conducted by the Padgett Foundation to figure out why so much of the money had gone unclaimed found that small businesses "believed the amount of work and associated fees outweighed the amount of the credit they would receive."

This telephone tax was imposed in 1898 to fund the Spanish-American War. In 2006, after multiple lawsuits, the Treasury Department decided to put the more than 100-year-old war behind it and give today's consumers and businesses some money back.

So the IRS started multiple campaigns to educate people about how to get their refund. But by November 2007, taxpayers had been refunded only $876.6 million, or 17.5 percent of the $5 billion collected. Only 5.6 percent of businesses (of any size) that could have claimed the credit, did so.

To get a refund, the IRS tried to simplify things by telling businesses that they didn't need a whole slew of phone bills to figure out their refund. Rather, they should compare two telephone bills from tax year 2006 to determine the percentage of their phone expenses attributable to the excise tax on long distance. Businesses had to figure the tax as a percentage of their April 2006 bill, which included the excise tax for local and long-distance telephone service, and their September 2006 telephone bill, which only included the tax on local telephone service.

The difference between the 2 percentages was supposed to be multiplied by the total telephone expenses for the 41-month period. The refund was capped at 2 percent of telephone expenses for businesses with 250 or fewer employees and 1 percent for firms with more than 250 employees.

Prior to finalizing the formula, the IRS received public input and discussed the issue with business groups, the Small Business Administration, and representatives from the tax-exempt community, according to the inspector general's report.

The IG's report said it's "likely that many businesses assumed that the costs spent on locating telephone expense records or the additional tax preparation involved in figuring the credit was not worth the gain received from claiming the refund. They might have falsely assumed that they would also have to file amended returns to reverse the expenses taken as deductions in prior years, resulting in additional tax preparation expense."

The Padgett survey also showed that taxpayers were concerned that they would not be able to provide the necessary records needed to support the credit claim, even though the IRS tried to simplify things by telling tax filers that they only had to locate two phone bills, not years' worth of phone bills.

Small Business Readers - Did you claim this credit on your 2006 or 2007 tax return? Did you think it was too complicated or were you even aware it existed?

By Sharon McLoone |  May 15, 2008; 3:54 PM ET Tax Tips
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Comments

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No, I wasn't aware that this tax credit was even available! I'm going to contact my accountant to see if I can get some money back... Thanks for the info.

Posted by: Avi | May 16, 2008 3:12 PM

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