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Suit contends many won’t get phone tax refund

Millions of small businesses and low-income taxpayers will be shortchanged or excluded altogether from a Bush administration tax refund program, lawyers who have filed a class-action lawsuit in the controversy said Friday.

The criticism comes amid a Treasury Department plan in which the public stopped paying a 3 percent federal excise tax on long-distance phone calls as of July 31. The tax collected by phone service providers had been levied without congressional authorization.

The government says taxpayers can get back the last three years of the excise tax payments by asking for the money on their 2006 tax returns. The Treasury Department said recently that $13 billion will be refunded, but it provided no estimates of how much the average phone customer might receive.

Many senior citizens and other phone customers will get no refund because their income is so low that they don’t have to file tax returns. A study by the nonprofit Center on Budget and Policy Priorities found more than 10 million households will be left out of the tax rebate program.

“Since I do not file a tax return, it does not seem right that I am expected to fill out a tax return because of what someone else took from me illegally,” James Gillis, 78, stated in a declaration in the lawsuit.

The IRS said it is developing a “very simple, straightforward form” for low-income people to file next year to get a refund.

“We recognize there are many people who have no filing requirements and we want to make sure that these people get the refund they deserve,” the IRS said in a statement.

Attorneys in the class-action suit filed in U.S. District Court in Washington say consumers ought to be entitled to refunds covering most of the past decade, not just the past three years. A study by Congressional Research Service estimated that $6 billion a year had been collected from the long-distance phone customers.

The tax has been levied for decades, dating back to when long-distance phone charges were based on time and distances of the calls. Many companies long ago dropped the distance factor and began charging a flat per-minute rate. The government continued to collect the tax, even though Congress had not amended the tax law to reflect the change in long-distance charges.

Large businesses started filing lawsuits, winning favorable court decisions. In May, the government stopped fighting the lawsuits, and the Internal Revenue Service issued the refund rule without seeking public comment.

“They met illegally behind closed doors and the refund is only a fraction of what the government took,” said Jonathan Cuneo, a lead attorney in the class-action case that the Bush administration is asking the court to dismiss.

Small businesses that lack the time or money to collect the last three years of their phone bills will be forced to rely on an IRS formula that is likely to shortchange recipients, said Cuneo.

“It would be very impractical for us to spend the time and money to go through our company’s old phone bills and determine the amount of money that we shouldn’t have paid in the first place,” said Peter Loevy, founder of Catering By Design in Conshohocken, Pa., and a plaintiff in the court case.