Federal Excise Tax Refunds Could be Paid in Full
Uncle Sam Owes You

Telecom managers who have battled through IRS channels to recover wrongfully-issued Federal Excise Taxes on LD voice services know that even victory is bittersweet. After the customary initial rejection and an appeals process, telecom managers and auditing firms say they've come away with between 33¢ and 39¢ on the dollar - the standard settlement the IRS appeals staff has been handing back to overtaxed enterprises.

But that could change if current litigation is successful. Washington, D.C.-based telecom law firm Levine, Blaszak, Block & Boothby has filed six lawsuits in federal district courts and the Court of Claims on behalf of large customers seeking back 100% of what they paid the IRS, says Steve Rosen, a partner at the firm handling those cases.

The firm already has moved for summary judgment in two of the cases and will soon follow with the other four, and expects substantial resolution at the trial level within six months. Should the litigation prove successful, it could give you ammunition toward getting back the full amount you're owed by the government, with new precedent in your favor.

"Some wins in federal court could, and it should logically make settlements more favorable, but it's still within the IRS' discretion," says Rosen. Since the excise taxes began being challenged and settled under appeal, enterprises, auditors and financial firms have been satisfied recouping roughly a third of what they're owed, he says.

"We decided that that isn't really fair under the law," Rosen says. "But people were used to it, and it was easy, and you didn't have to sue. The fact of whether it was consistent with the applicable taxation statute wasn't at issue."

Why Your Enterprise is Overpaying the IRS

Old habits die hard, which could help to explain why each month you take an additional 3% of your LD voice spend and send it to the IRS in the name of a 100-year-old telecom tax that the government itself knows is obsolete, say industry lawyers and auditors. They argue that the Federal Excise Tax has been misapplied. for more than two decades, but quickly add that a time tested Washington cash caw isn't going away soon.

"They're not going to fix says Louis Crespo of East Rutherford, NJ-based auditing and consulting firm Teldata Control. But that-doesn’t mean you can't recover your money - or at least part of it. It requires power of attorney and the proper forms, or outside help, and time. Claims are made for three-year periods, and the entire process takes about 14 months, Crespo says.

Is it worth the time and effort? Crespo, whose firm charges a contingency fee and will only take on businesses that spend $2,000/month or more on LD, says refunds are worth pursuing regardless of size. The availability of in-house resources factor in, but the principle remains.

"If I'm a company and it's my LD spend, it's worth it, because it's my money, and I'm keeping 33¢ on the dollar," he says.

Why the IRS Will Refund Your Money...

Enacted in 1898 to fund the Spanish-American War, the telecom excise tax is 3% on local telephone service, toll telephone service and teletypewriter exchange service. It's collected by carriers, which forward the money to the government.

"This is not really a carrier issue," says Steve Shea of consulting firm TechCaliber in Washington, D.C. "This claim is with the IRS -- the carrier is an agent for the government."

Here's the major catch with the tax: In IRS publication 510, toll (LD) service is defined as "a telephonic quality communication for which a toll is charged that varies with the distance and elapsed transmission 'time of each communication".

(Part 49 of the Internal Revenue Code defines what are designated Facilities and Services Excise Taxes; sections 49_4251 and 4252 deal specifically with those levied on telecommunications services_)

"Domestic service now has 'postalized' rates - it's not based on distance," Rosen points out. "The IRS has been aware of this since at least 1979." Then, a group of large users brought a claim against the IRS pointing our the language of the code, which reached settlement. Since then, large users have been filing claims requests, which can be submitted at the close of each taxable quarter, Rosen says. But don't expect a quick reimbursement.

Here's how the system works: users file Form 8849 - a claim for refund of excise taxes - with the IRS, which the IRS will unilaterally reject, says Rosen- Within 34 days of the rejection an administrative procedure allows the claimant to request an audience with the IRS appeals staff. If you follow the process through to the end, that staff will settle, offering you an approximate 33% return on taxes you never should have paid.

...And Why It’ll Require Your Share of Patience .

But don't expect refunds overnight. Consider Dale Marzano, sr. commodity manager at GATX Corp- in Chicago.  In November 2002, through Roseville, Calif-based law Firm; VGS Associates, he submitted Form 8849, along with billing documentation dating back to October 1999, and the appropriate power of attorney forms.

In June, eight months later, his case was assigned to an agent, who requested roughly 25 pages of additional information. A month later, he says, "I received my initial, disallowance letter. I have been told it is standard practice to disallow, and hope we go away." In late August, VGS and Marzano submitted his request for appeal.

What's the delay? The answer may sound familiar. "It's billing platforms," says Teldata ControI's Crespo. Local and federal issues, along with commercial and individual return issues, tax the government's systems.

"It’s the inability to build new technology on top of old architecture - they can't fix it," he says. "It's the same on the telecom [carrier] side - on legacy systems there are hardware and software platforms that are incompatible, and they're not in a position to revamp existing hardware."

And here's another complication: There's some question as to whether the IRS has put on hold its traditional refund process, pending the outcome of the litigation by Levine, Blaszak, Block & Boothby. At Antares Management Solutions in Westlake, Ohio, telecom coordinator Tony Slak says he's been told the IRS is in a holding pattern awaiting the results of the pending litigation against it.

Regardless, the IRS is continuing to examine claims filed before the suits were filed, says TechCaliber's Shea. And the IRS continues to accept new reed claims.

Slak says his enterprise has signed on with financial firm PricewaterhouseCoopers to audit Antares' bills and attempt to recover the excise tax. The process there is not under the telecom department, Slak says, as PWC is working primarily with the tax department. In fact, Slak says he's not privy to the percentage PWC is taking off the recovered amount.

"The work will be done on a contingency basis, and PWC has guaranteed us nothing in the way of a return, just a percentage of the return if they find a recovery and can convince the IRS to cough up the money," he says "I understand that the IRS is being very tight-fisted in these matters. But at least the cost of the audit to us is practically zero."

It's painless, too, as Slak is in the process of setting up PWC with online access to Antares’ phone bills. And Slak has done a bit of back-of-the-envelope math, estimating that his enterprise has shelled out about $25,000/year in excise taxes on LD services. Antares spends about $1 million/year on LD, which is down from roughly $2 million in the past.

An IRS suspension of the refund process may add time to your wait, but it also could provide a major boost to your return. Consider. a new 100¢-on-the-dollar settlement precedent would amount to nearly $50,000 more in a return over a three-year period.


The Cost-Benefit Analysis of Filing a Claim

Under the IRS' Current refund system, filing to get your money back "is worth it if you have enough of a potential refund that it outweighs the effort of filling out the forms and following the IRS guidelines," says Steve Rosen of Washington, D.C.-based telecom law firm Levine, Blaszak, Block & Boothby.

How to determine whether or not the work outweighs the effort rests with you­
Here's some back-of-the-envelope math to consider, though. if you're billing $1 million/year in LD, you're paying $30,000/year in excise taxes, of which you should expect to recoup roughly $10,500 under the IRS' current settlement - nothing to sneeze at But taken over a three-year period - the period in which the IRS accepts excise tax refund filings, your lump sum refund triples.

And, should Rosen's firm succeed in upping the settlement, expect an even, larger amount back_ Telecom consultants say regardless of size, there's no reason to not request a refund.

'Virtually any enterprise user paying the Federal Excise Tax should be looking to do a refund claim with the IRS,' says Steve Shea, of Washington, D.C. based consulting firm TechCaliber.

"The IRS says [taxed services] have to be time and distance sensitive, and [LD] is not. Most carriers have postalized rates. It's pretty simple."

... And How Ensure You Don't Overpay

If your enterprise is non­profit, government or media, for example, you need to look into what other taxes you could be exempt from under IRS law, advises Karen Thatcher of TelCon Associates in Overland Park, Kan.

"It really depends on the user when you're talking taxes," she says. If you are exempt from paying certain telecom taxes under the IRS, Thatcher recommends a few steps you should take to ensure that you're not overpaying.

  • Know what your exemptions are. Don't expect your carrier to inform you of what taxes you shouldn't be paying, she says- You've got to be proactive.
  • Know what forms to file, and who to file them with. This varies according to circumstances, but generally you file forms with your carrier, who in turn files them with the IRS. Thatcher's firm recently had to file directly with the IRS on behalf of a hospital that had paid taxes it didn't owe. The process took 18 months, but once you've filed the forms, the IRS allows for interest to be paid. "So the waiting isn't that bad," she says.
  • Repeat the process when signing new contracts or switching carriers. Better yet, let your carrier know on an annual basis what your exemptions are regardless, Thatcher advises, since forms often have a way of getting lost or ignored over time. But this especially holds true when changing to a 'new carrier, or even re-upping a contract with an incumbent.