$60k FET Claim Challenge; 5 Firms on IRS Agent Hit List
June 11, 2007 (Vol. 28, No. 12)
Hope you didn’t stack those carrier bills in the corner of a dusty closet after submitting your Federal Excise Tax refund request. You might need to find those documents quickly again if the recent experience of a New York alarm company is any indication.
The enterprise, which has been asked to provide documentation to support a more-than-$60,000 FET refund request, is one of at least five firms a Tennessee-based IRS agent has been asked to investigate, Voice Report has learned. But the scrutiny of enterprises’ FET claims doesn’t end there.
The IRS first announced in January that it “is investigating potential abusers among early filers who requested large and apparently improper amounts for the telephone tax refund.” [VR 2/5/07] Though its earlier statements and actions appear to focus on excessive refund requests made by individuals, a nationwide effort also is underway to catch enterprises asking for too much in return, confirmed IRS spokesman Eric Smith late last month.
Just as your enterprise has three years to amend its 2006 tax returns to correct or even add an FET refund request that was omitted from your original filing, the IRS also has three years to audit your FET-related tax returns, Smith says. Though audit times can be extended even longer in cases of apparent fraud (forever) or missing information (six years on information that amounts to 25% or more of omitted income), he adds.
In addition to being ordered to repay the FET refund you were paid that was deemed to be excessive, you also could be asked to pay late fees and interest.
But the IRS agent interviewed by Voice Report seems to be under the gun to audit enterprises’ FET refund requests much faster than three years. “I can tell you it is our No. 1 priority,” says the agent, who asked to remain anonymous.
What to Expect in an FET-Related Audit
So, what most likely will get your FET refund requests audited?
Returns initially are reviewed by software that’s programmed to flag apparent anomalies, says Smith, who was unable to provide the specific parameters used to identify suspicious FET refund requests. Examiners also scan returns for abnormalities that don’t “meet the smell test” – say, an individual who requests a $100,000 FET refund request when they only make $20,000 a year – then pass along their findings to agents in the field, Smith says.
But Nancy Wickett, director at Partner Consulting, in Hamden, Conn., says she wasn’t surprised when the IRS requested more documentation to support her alarm company client’s more-than-$60,000 FET refund request. Roughly $70,000 of the enterprise’s $100,000 in monthly telecom spend during the months eligible for FET refunds was related to toll-free inbound service – the method by which the company receives alarm signals, she says.
Prior to the IRS request, Wickett says she already had provided the alarm company with a binder that included copies of its bills, a recap of how she retrieved data from the enterprise’s three primary carriers (AT&T, Verizon Business and PAETEC) and her calculation spreadsheet using the actual-taxes-paid method. Wickett says the enterprise was not able to recover all of its historical bills, so in some cases she substituted copies of her consulting firm’s own reports, provided to the enterprise during the same periods, which happen to restate invoice amounts. The IRS has yet to let Wickett or her enterprise client know if it will receive the full refund requested.
You’ll know if your FET refund request is being audited when you receive a Form 4564 TET in the mail. You might have just a month to respond, if the letter reportedly received by the New York alarm company is any indication. Fail to respond and you’ll get a call, visit or other correspondence from an IRS agent, says the IRS agent interviewed by Voice Report.
If you are subjected to a discussion with the IRS, be ready to field questions that get at whether you were under competent instruction in compiling your FET refunds, the IRS agent suggests. He says he asks, “Where did you get information regarding FET refunds?” “Who prepared your FET refunds?” and “How did you compute your FET refunds?”
Among the documents you should pull together to make your case, according to Form 4564:
- Another copy of your Form 8913 – the document you used originally to request FET refunds – and a list of total telecom expenses incurred for each of the 41 months between March 2003 and July 2006 for which you requested a refund. The IRS says it will accept this list if it is taken from your ledgers, financial statements, phone bills or similar books and records.
- Statements from telephone service providers verifying your refundable federal excise tax paid. It cautions that carriers may charge you for copies of your past bills or an itemized statement.
- A copy of the work papers, summary sheets or any other similar documents used to compute the telephone excise tax refund requested, plus copies of the entire telephone bills, if you calculated the actual amount of taxes paid. That includes the portion of the bills that show the actual federal telephone excise tax for April, July, October and December 2003; April, June, September and November 2004; January, April, September and December 2005; February, April and June 2006.
The seemingly inconsistent dates are likely an attempt by the IRS to get a random sample of invoices from the eligible period, suggests telecom attorney Steve Rosen, a partner at Levine, Blaszak, Block & Boothby, in Washington, D.C. Rosen and partner Hank Levine represented 35 enterprises seeking FET refunds, including four to win at the appellate court level before the IRS surrendered the refunds.
- Copies of phone bills that show the actual taxes charged for April and September 2006, if you used the IRS’ estimation method.
Rosen says Form 4564 appears to approve of alternative estimation methods by asking enterprises to explain and provide any workpapers used in relation to any variations in approach. Approval of other methods would be a departure from the IRS’ latest guidance, issued in Notice 2007-11, but it makes sense: “They can’t prescribe only one estimation method without actually having a formal notice and comment rulemaking and listening to what people say,” he says. (