After 32 years of IRS work — and more than $100 million in resolved tax debt — I've seen just about every version of the problem you're dealing with. I'm Darrin Mish, a tax attorney in Tampa. Here's what you should know.
Did you know that you could be paying indirect taxes to the IRS every time you used your cell phone? To understand what is going on, you need some background information. In the years before cell phones, telephone service providers would charge their customers based on distance and duration of the phone call. According to their revenue, the telephone companies have been paying corporate taxes in the form of a 3% excise tax. Click here to watch or read more information on IRS Back Taxes.
All was fine until the introduction of cell phones. Since cell phones are mobile and can be used anywhere, the charges based on distance did not apply anymore. Consequently, telephone service providers ceased to charge their customers based on distance and instead charged solely based on the duration of the call. But the IRS did not change their tax structure to accommodate this change. They continued to charge telephone companies corporate taxes based on long distance calls. If corporate taxes remain high, telephone companies might pass the extra taxes they have to pay on to the end users, you and me. This is how you could be paying taxes to the IRS indirectly through the telephone companies.
This led to several affected corporations suing the IRS for a refund of the extra taxes. Unsurprisingly, they won in five federal circuit court cases and the IRS was forced to issue refunds. But as if to add salt to the wound, the IRS came up with a complex method to apply for and receive the refund, which is estimated at $8 billion over the years (that’s ‘billion’ with a ‘b’). Those who wanted the refunds could make their applications together with their 2006 tax returns. They were given two choices of amounts of refunds. Taxpayers could request for a ‘safe harbor’ amount or the actual amount of taxes paid by them. If they chose the latter, they would most certainly have to provide plenty of documentation to the IRS before their refunds could be approved.
As a result, nearly half of the overpaid taxes remained unclaimed and therefore, not refunded. Taxpayers again sued, this time over the refund process, stating that it was too complicated and discouraged many from seeking the refunds that were rightfully theirs. At first, the district court threw out the taxpayers’ case but later the Washington D.C. appellate court reversed the decision and reinstated the suit. In doing so, the appeals court dismissed the IRS’ bid to dismiss the taxpayers’ claims by deeming the refund notice merely a policy statement for itself and not a binding rule it had to follow.
The appeals court found the IRS guilty of unlawfully collecting billions of dollars from taxpayers, and when its actions were found to be illegitimate, the agency put in place a convoluted procedure by which taxpayers had to comply in order to get a refund of the taxes they paid. And when even the procedure itself was found inappropriate, they further attempted to dismiss taxpayers’ legitimate claims by claiming their procedure was a policy statement not a binding rule.
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