A class-action lawsuit has been filed, challenging the Internal Revenue Service's plan to reimburse taxpayers for their past three years' worth of long-distance phone taxes.

The lawsuit claims that small businesses and low-income taxpayers will be shortchanged, or completely excluded, from the tax refunds.

In May, the Treasury Department conceded a legal dispute over the tax, after five federal appeals courts upheld rulings that the 3 percent federal excise does not apply to long-distance service as billed today. As part of that concession, the government announced it would officially end the tax on July 31 and taxpayers would be eligible to file for refunds of all tax, plus interest, that they have paid on long-distance service billed to them after Feb. 28, 2003.

The Treasury Department said that about $13 billion will be refunded, while IRS Commissioner Mark Everson said that the process of obtaining a refund would be "simple and fair." No estimates of how much the average phone customer might receive have been offered.

The lawsuit said that many senior citizens and other phone customers wouldn't be able to collect a refund because their income is so low that they don't file tax returns. A study by the nonprofit Center on Budget and Policy Priorities said that more than 10 million households could be left out of the rebate program. Attorneys also argue that consumers should be entitled to refunds covering most of the past decade, not just the past three years.

The Bush administration has asked the court to dismiss the suit.

Washington law firm Cuneo Gilbert & LaDuca LLP is representing the plaintiffs and filed the class-action suit in U.S. District Court in Washington.

Previously on WebCPA:

IRS to Issue Long-Distance Phone Tax Refunds (May 26, 2006)

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