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Dial up tax refunds for your long-distance phone calls

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The feds have finally thrown in the towel: After suffering a string of losses in the appellate courts, the IRS concedes that long-distance phone services aren’t subject to federal excise tax. (IRS Notice 2006-50)

As a result, individual and business taxpayers can file for refunds or credits on their 2006 tax returns.

Strategy: Hold on to your telephone bills. Although the IRS is developing a “safe harbor” method for individuals, including self-employed taxpayers, it will be lower than the actual tax you’ve paid. If you have the proof, you can demand a refund or a credit for the higher amount.

Here’s the whole story: The excise tax on long-distance services is currently 3 percent. Now, the IRS says it will issue credits or refunds, plus interest, of excise taxes paid on long-distance services billed between Feb. 28, 2003, and Aug. 1, 2006.

Under its new notice, the IRS says it will stop collecting the 3 percent tax after July 31, 2006. Some of the other issues that the IRS clarified in its notice:

-Both long-distance service and bundled services (i.e., local and long-distance service provided under the same charge) will be exempt from the excise tax. You’ll continue paying tax on local-only services.

-The IRS will deny requests for refunds on phone taxes paid after July 31. You’ll have to direct those requests to the collectors (e.g., telephone companies).

-You can request a tax credit or refund only on your 2006 federal income tax return.

-The refunds or credits are available to partnerships, S corporations, estates and trusts, tax-exempt organizations, corporations and other non-filing entities. The amounts for pass-through entities will be reflected on their Schedule K-1s.

Tip: Hold on to your cell phone bills and prepaid calling card receipts, as well. The IRS also says the federal excise tax doesn’t apply to wireless telephone services and prepaid calling cards.

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