03:30 PM EDT on Sunday, June 25, 2006

By Neil Downing / The Providence Journal

Stand by for another federal tax rebate.

This one won't be as valuable as the rebates of 2001 and 2003. Still, every little bit helps, especially when you're facing sky-high energy costs and other expenses.

So what's going on?

It has to do with that quirky little telephone tax, the one that shows up on your phone bill.

Some federal courts recently decided that the 3-percent tax shouldn't apply to long-distance phone service. The Internal Revenue Service said last month that it will go along with those court decisions.

As a result, the IRS will soon stop collecting that tax, the one you normally pay to your long-distance provider.

In addition, the IRS will let you claim a rebate for the tax you already paid.

Although we're talking about an excise tax here, not an income tax, you'll have to claim the rebate through your federal income-tax return, the one you file early next year, said Margaret Monteiro, senior tax specialist with the IRS in Providence.

The government first imposed the tax in 1898, to help pay for the Spanish-American war. But it'll let you claim a rebate only for the excise tax you paid on long-distance telephone service in the last few years.

That's where your old phone bills could come in handy. Odds are you'll be able to use those bills to see how much of the tax you paid.

If you can find your bills, and add up all the excise tax you paid on long-distance telephone service over a certain period of time, you'll be able to claim a rebate for that amount.

The rebate applies to tax you paid on long-distance phone services billed to you after Feb. 28, 2003, and before Aug. 1, 2006, the IRS said in a recently published notice.

So you don't have to go through all your old phone bills, just some of them.

How much of a rebate will you get? It'll vary from taxpayer to taxpayer, but it probably won't amount to much.

For example, suppose you logged $30 a month in long-distance telephone service over the period in question. At a rate of 3 percent, the tax you paid probably comes to around $36.

So that's not a lot. But remember that this isn't a deduction; it's a rebate (technically, the government is calling it a refund or credit). So if you claim $36, you'll get the full $36. And ask yourself: Is $36 better off in your pocket or in Uncle Sam's?

Besides, to the average consumer, it's essentially found money, said Patricia A. Thompson, a member of the national tax executive committee for the American Institute of Certified Public Accountants. "It seems to me it's a bonus, because we weren't expecting anything," she said.

Businesses will also be able to claim the rebate, said Harold "Hal" Gadon of Cranston. Gadon is Rhode Island's representative on the Taxpayer Advocacy Panel, a federal advisory group that gathers complaints and suggestions from taxpayers and presents them to the IRS.

For businesses, the rebate amount "could be more significant" than that for an individual, Gadon said. That's because businesses typically use more in long-distance phone service, he said.

Businesses will claim the rebate on the federal income-tax form they file early next year. The same is true for individuals — and they'll be able to claim it no matter if they file a Form 1040, 1040A or 1040EZ, Monteiro said.

A few other key points:

• Safe harbor: What if you can't find all your old phone bills to calculate the actual amount of tax you paid? The IRS will come up with a simplified method for you.

You'll be able to claim a standard figure, a "safe harbor" figure, on your return, Monteiro said in an interview last week at John Hope Settlement House, a community center based in Providence's West End.

In other words, the IRS will give you the option to claim a rebate based either on the actual amount you paid, or on the "safe harbor" amount, IRS Commissioner Mark W. Everson said in a statement.

"So taxpayers won't have to spend time digging through old telephone bills, we're designing a straightforward process that taxpayers may use when they file their tax returns next year," he said. "Claiming a refund will be simple and fair."

How much will that "safe harbor" amount come to? Nobody knows yet; it's "still under consideration and will be announced in later guidance," the IRS said in its official notice.

• Record-keeping: If you claim a refund for the actual amount of tax paid, the IRS wants you to have some paperwork handy to substantiate your claim.

For example, if you're audited, you'll be expected to produce copies of the bills you received, as well as your canceled checks "or other evidence that the amount requested was actually paid," the IRS said in its notice.

Thompson, who is also tax partner with Piccerelli Gilstein & Co. LLP, a CPA firm in Providence, said, "I think that most taxpayers are going to use the safe harbor [figure], because they're not going to want to go back through all their phone bills" and then substantiate their claims, she said.

Businesses, nonprofit organizations or others won't be able to use the safe-harbor amount; they'll have to base their rebate claim only on the actual amount of tax they paid, the IRS said.

• Filing requirement: Suppose you don't have to file a return early next year. Can you still claim a rebate? Yes, but some paperwork will still be required. "Persons that are not otherwise required to file a federal income tax return must nevertheless file a return to obtain the credit or refund," the IRS said in its official notice.

In that case, you'll have to use a new form the IRS is putting together, Form 1040EZ-T, Monteiro said.

Keep in mind that the IRS's decision was issued only last month, so the agency is still working out the details. For example, the IRS says that the forms and instructions it issues for the coming tax-filing season will include more guidance on the topic.

• No more tax: In announcing its decision last month, the IRS also said it will stop collecting the federal excise tax on long-distance telephone service.

The IRS told phone-service providers to stop collecting the tax for long-distance service that's billed after July 31, 2006. So any bill you receive from your long-distance phone service provider after next month shouldn't contain the tax, Monteiro said.

• The local tax: Although the tax on long-distance phone service will go away, the federal excise tax on local telephone service remains in effect. However, U.S. Sen. Charles Grassley, R-Iowa, said he wants to abolish that tax, too.

"It's time to give up the ghost and get rid of this outdated tax," Grassley said in a statement. The tax began as a levy "for a war that ended 100 years ago. This tax hits every telephone owner, but it doesn't pay for any specific program. It now pours billions into the U.S. Treasury every year for no reason. It's time to hang up the telephone tax."

The Senate Finance Committee, which Grassley heads, may review legislation later this week that would abolish the tax, according to RIA of New York, a publisher of tax information for accountants and other tax professionals.

• Complicated history: The federal excise tax on telephone calls (also known as the "communications tax") was created under the Spanish War Act of 1898, and began as a tax only on long-distance service, according to a recent report by the Congressional Research Service.

After that, the tax took some twists and turns. For example, it was repealed in 1902, but re-enacted in 1914 as the nation prepared to enter World War I. In 1941, shortly before the country entered World War II, the tax was broadened to include local telephone services.

• Different rebates: The rebates that will be issued early next year are different from the ones the Treasury issued in 2001 and 2003. This one was sparked by federal court decisions and involves the refunding of amounts paid as federal excise taxes.

The 2001 and 2003 rebates involved federal income taxes, and were the result of legislation approved by Congress and signed into law by President Bush. They were also potentially far more valuable: In general, the 2001 rebates were for up to $600, the 2003 rebates up to $400.

MoneyLine correspondent Neil Downing is a staff writer for The Providence Journal in Rhode Island and author of "The New IRAs and How to Make Them Work for You." Do you have questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail moneyline@projo.com.

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