This week, Gail tells taxpayers: don't play with fire if you don't want to get burned.

Dear Friends,

If you've never had the pleasure of experiencing an IRS audit and have been dying to find out what it's like, here's a sure-fire recipe for triggering one:

Exaggerate the size of the telephone tax refund you claim you're owed.

You may recall that last summer, several federal courts ruled that based on the way long-distance service is billed today the federal government doesn't have a right to continue slapping a 3 percent tax on the long-distance portion of your monthly phone bill.

Anyone who has long-distance telephone service — including wireless and VoIP — is entitled to a refund of all long-distance tax paid from March 1, 2003 through July 31, 2006. (Federal excise tax will still apply to local phone service.)

There are two ways to claim this refund: easy and hard.

Rather than require us to resurrect every phone bill we received over that period, the government came up with "ballpark" estimates of what you probably paid based on the number of dependents claimed on your tax return. These amounts range from $30 to $60.

So the simplest approach is to claim the "standard" amount that applies. You can find this on the Internal Revenue Service Web site under "Telephone Excise Tax Refund." Enter this on the special "Telephone Tax" line found on all 2006 federal tax return forms.

If you're a stickler for details and want to make sure you absolutely get every single penny back, then you have to dig up 41 months of phone bills (sticklers always save them) and fill out additional paperwork: Form 8913. This is where you calculate the total amount of long-distance excise tax you actually paid. Form 8913 has to be attached to your income tax return.

Although either method sounds pretty straightforward, two major problems have arisen. Ironically, they represent opposite ends of the spectrum: not claiming any telephone tax refund and claiming too much.

Millions of people who qualify are not claiming this refund.

Some 136 million tax returns are expected to be filed for 2006 and the IRS says "most" are eligible for the long-distance tax refund. However, as of two weeks ago, more than 10 million tax returns received by the IRS had left this line blank.

Amazingly (or maybe, not) nearly half of these were completed by tax "professionals"!

Even if you're not required to file an income tax return, you're still eligible for this refund. According to the IRS, "more than 10 million low-income people, many of them senior citizens" qualify for a refund of their phone taxes. Folks who fall into this category simply have to send in Form 1040EZ-T.

However, you've got to enter an amount on Line 1a to indicate the refund you're claiming. It's not enough to simply send in the form with just your name and address filled in.

Note: If you claim the long-distance refund on your tax return, do not claim it again on Form 1040EZ-T; this will slow down your refund.

Many taxpayers are claiming exorbitant refunds.

According to the Internal Revenue Service, this year's numero uno tax scam involves tax preparers who are promising customers big refunds by claiming fraudulent and ridiculously large refunds of federal telephone tax. In extreme cases taxpayers are claiming that the amount they paid in long-distance tax exceeded their income!

IRS agents and investigators recently busted tax preparation businesses in Atlanta, Miami, New Orleans, Dallas, Riverside (CA), Athens (TX), and Tyler (TX) for allegedly deliberately inflating the size of the refunds they claimed on client tax returns. They temporarily shut these firms down and seized computers and documents as evidence.

The IRS says agents will be paying "visits" to additional tax preparation businesses around the country and will pursue criminal charges.

So, to sum this up:
1. Be sure you claim the long-distance telephone tax refund if you're eligible. Remember, you're just entitled to a refund of the amount of tax you paid, not your entire long-distance bill, and
2. Don't fall for some slick tax preparer come-on about getting "thousands" of dollars back. Anything in excess of the "standard" amount ($30-$60) will send up a red flag when your return is processed.

In the words of the IRS, "Taxpayers who request more of a refund than they are entitled to receive will have their refunds held and be subject to an audit."

Trust me, it isn't worth it.

Hope this helps,
Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.