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Small Taxpayers Say IRS Phone Tax Refund Rules are Unlawful, Unfair & Exclude Millions of Americans

Behind closed doors, IRS made rules that will exclude the less affluent from refunds; Class Action Lawsuit seeks return of as much as $40 billion to all taxpayers.

SB Informer
Friday, July 7, 2006; 02:40 AM

Washington, July 6 - Taxpayers today filed an amended complaint in the United States District Court for the District of Columbia asserting the Internal Revenue Service devised rules that will effectively deny refunds to and shortchange American taxpayers entitled to refunds by billions of dollars. The IRS devised these rules without public input. The tax refund and credit rules released May 25 will harm the interests of all consumers of phone services and leave millions with nothing, the lawsuit asserts.

The amended class action lawsuit, Sloan, et al v. United States of America acting by and through the Internal Revenue Service, was originally filed on March 15, 2006 to end the illegal three percent federal excise tax upon long distance phone calls and sought the return of all money unlawfully exacted through the excise "tax" upon certain long distance and wireless telephone charges added to consumers' monthly bills for more than eight years. Two months after the case was filed -- with motions for preliminary injunction and class certification pending and in the face of five U.S. District Courts of Appeal declaring the excise tax to be illegal -- the government announced it would stop collecting the tax and refund the money to taxpayers. Now, the Sloan plaintiffs, including individual and small business taxpayers, call for an accounting and fair, efficient and accurate restitution, with interest, to all taxpayers of the tens of billions of dollars unlawfully exacted before the Government acknowledged that the tax was illegal.

Secret Rules Issued by Fiat Violate Law and Exclude Millions of Taxpayers

"Unfortunately, after years of illegally 'nickel and diming' Americans on their phone bills, the IRS would now shortchange everyone and arbitrarily impose huge burdens on small businesses and many low income individuals especially senior citizens," explained

Jonathan Cuneo of Cuneo Gilbert & LaDuca, LLP of Washington, DC, a co-lead attorney for the plaintiffs. "Behind closed doors, the IRS by fiat made demographic choices in designing the tax refund rules that will effectively deny the less affluent the ability to recover their own money."

The IRS rules governing the excise tax refund or credit published May 25 as Notice 2006-50 were devised without the public review or input required by the Federal Administrative Procedure Act, the lawsuit asserts. The IRS would allow for a refund/credit of taxes paid during only three of the eight years the tax was illegally exacted. And, by requiring all taxpayers to file income tax forms to receive the refund/credit they are entitled to, the rules effectively exclude millions of non-filers such as senior citizens and other low income consumers of phone services whose level of earnings fall below the minimum filing requirement. Finally, unlike individual taxpayers who may opt to accept a flat "safe harbor" refund/credit dollar amount (yet to be determined by the IRS), small businesses are required to compile years of monthly phone bills and calculate the actual amount of taxes they illegally paid before receiving anything.

IRS Unlawfully Acted To Cut Payback of Taxpayers' Own Money

"For no stated reason and with no legal authority to do so, the IRS unilaterally acted to sharply cut the payback of taxpayers' own money," Mr. Cuneo continued. "It is simply unfair to exclude millions of non-filers from the payback and force small 'mom and pop' businesses to expend hours and hours collecting and analyzing over years of records in order to receive their own money."

According to AARP, at least 37 percent of those aged 65 or older, or 13 million Americans, did not file income tax returns in 1998 because they did not earn enough money to be required to do so. But, most of those seniors and millions of other Americans with low incomes had telephones and paid the illegal excise tax on their monthly bills during that year and in each successive year. The Class's attorneys contend most of those taxpayers will not benefit from the refund rules as now constructed because they do not file income tax returns.

Taxpayers Entitled to As Much As $40 Billion Unlawfully Collected

Five Federal Appeals Courts (in the Second, Third, Sixth, Eleventh and District of Columbia circuits) have ruled in lawsuits brought by major corporations that the communications excise tax was never authorized by Congress as required by the Constitution. The CONGRESSIONAL RESEARCH SERVICE (CRS), which in an April 24 report described the tax as "regressive" because it did not "treat similarly situated taxpayers equally" and "reduces overall economic welfare," estimates the tax exacted a total of about $6 billion each year from virtually all Americans with long-distance telephone service.

"Using the CRS annual estimate, between $30 and $40 billion was collected unlawfully by the government since 1998," according to Nicholas Chimicles of Chimicles & Tikellis LLP of Haverford, PA, another co-lead counsel for the plaintiffs. "A long series of Supreme Court decisions demonstrate taxpayers are entitled to the 'clear and certain' remedy of full restitution of taxes, plus interest, collected in violation of federal law."

The three percent federal excise tax is levied upon toll charges for long distance service as defined in 1965 and should have been applied only where the charge for a toll call varied on the basis of both the distance and elapsed time of each individual call. But, most long-distance carriers now charge a flat per minute rate for calls to anywhere in the nation. AT&T, for instance, had abandoned distance and time formulas by 1997 and MCI followed in 2000.

IRS "Arrogantly" Violated The Law; Small Taxpayers Left in Dark

"As technology changed and more telephone services were billed at flat rates, the government never went back to Congress to seek a three percent excise tax on long distance service based on elapsed time only," explained Robert Cynkar of Egan, Fitzpatrick, Malsch & Cynkar, PLLC, a Deputy Assistant Attorney General of the United States during the Reagan Administration and another attorney representing the plaintiffs. "Instead, in a clear violation of the Constitution, the government simply imposed the tax, which was small and went unnoticed by most individuals. Now, by promulgating unfair refund rules without public input, the government has arrogantly violated federal law yet again. Conservatives should be out-raged."

Among the corporations that had earlier won federal appeals court decisions finding the tax illegal and that won tax refunds are AOL, Hewlett Packard, OfficeMax and Honeywell. "These companies that challenged the tax -- and won -- performed a valuable service," said Hank Levine of Levine, Blaszak, Block & Boothby, LLP, one of the Sloan class action plaintiffs' lawyers and lead counsel in most excise taxpayer court victories to date. "But, even as companies were winning relief from this unauthorized tax, it is only through a class action like ours that smaller taxpayers can gain relief from being systematically fleeced by this illegal tax. And, ours is the first case to point out the fatal flaws in the Government's new refund rules."

For a copy of complaint and other documents, please contact Jonathan Cuneo at 202-789-3960, Nicholas Chimicles at 610-642-8500, or Jeff McCord at 540- 364-4769.

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