Question: Is the 2006 federal telephone excise tax refund taxable when filing a tax return for 2007?  If Form 8913 was filed in 2006, will taxpayers be issued a 1099-INT for the amount of the interest that was calculated?

Answer:

(1) Taxpayers who requested the standard amount (which represents both taxes paid on nontaxable services, and interest on those taxes), do not have to include any of their refund or credit in income for any tax year.

(2) Any taxpayer who requested a credit or refund of the actual amount of the telephone excise tax paid on nontaxable services, or an eligible entity that used the estimation method, must include the interest paid on the credit or refund as income on the return for the tax year in which the interest is received or accrued. Thus, individuals are generally required to report the interest on their 2007 income tax returns. 

(3) Business taxpayers normally can deduct the cost of telephone service, including related taxes. Thus, if the taxpayer later receives a refund of those taxes, the taxpayer normally must include the refund, along with any related interest, in gross income in the year it receives the refund. So, a taxpayer who requests a telephone excise tax refund on the taxpayer's business return, and receives that refund in 2007, would generally have to report it as income on the taxpayer's 2007 tax return. This rule applies the tax benefit rule of Code Sec. 111 which provides that the recovery of taxes deducted in an earlier tax year is includible in gross income, except to the extent that the deduction did not reduce the tax imposed.

We know taxes! If you have tax questions, please contact Principal Lew Elicker, CPA or Tax Specialist Crystal Martin at 717-757-6999 or 800-745-8233 or send her an email by using the form below.

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