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Coal Excise Tax Edition

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IRS Tax Audit Manual for Coal Excise Tax

Section 4121 of the Internal Revenue Code imposes an excise tax on domestically produced coal. The taxes collected on the sales of coal are deposited to the Black Lung Disability Trust Fund to finance payments of black lung benefits to afflicted miners.

BLACK LUNG

The Black Lung Benefits Act of 1977 was enacted by Congress to compensate individuals afflicted with the disease known as pneumoconiosis or “black lung disease.” Inhaling coal dust for prolonged periods of time, usually at least 10 years, causes black lung disease. In the early stages, black lung disease does not cause respiratory impairment. However, impairment eventually occurs and despite avoidance of further exposure, death usually occurs within a few years.

Producers of coal in the United States are liable for the tax upon the first sale or use of the coal. The producer is the person who has vested interest in the coal immediately after its severance from the ground without regard to the existence of any contractual arrangements for the sale or other disposition of the coal or the payment of any royalties between the producer and third parties.

ISSUE IDENTIFICATION

Examinations of coal producers have identified numerous recurring issues resulting in substantial underpayments of coal excise tax liabilities. The IRS Tax Audit Manual for Coal Excise Tax includes the 12 largest potential audit issues related to the coal excise tax; each section includes a detail explanation, cites the appropriate Code sections and references, and identifies helpful audit techniques.

Take a look at the following questions….If you don’t know the answers to these questions or understand how the answers to these questions can and will affect your tax liability – you could find yourself behind the eight ball when you meet with the Internal Revenue Service Audit Agent..

  1. Is it permissible to reduce the taxable weight of coal by excess moisture and what method should be used by taxpayers in calculating this reduction in taxable weight?
  2. Who is liable for the coal tax when the miner does not possess an ownership interest under state law?
  3. How do you determine the FET when it is included in the sale price?
  4. How is the producer’s tax liability for coal calculated when that producer also purchases coal from unrelated producers?
  5. Should transportation costs be excludable in arriving at the taxable sales price of coal?
  6. Is the cost of adding a freeze-dried additive to coal allowed as a reduction in computing the taxable sales price of coal?
  7. Should the tax imposed by IRC Section 4121 be based on raw or clean tonnage sold?
  8. If coal sold is a mixture of underground and surface coal, how is the tax liability under IRC Section 4121 determined?
  9. Is coal extracted from a riverbed by dredging operations subject to IRC Section 4121 tax on coal?
  10. Is a person who extracts coal from a coal refuse pile subject to IRC Section 4121?
  11. Is coal used by a producer in a thermal-dryer to dry the producer’s own coal subject to the IRC Section 4121 tax?
  12. Can a producer of coal subject to IRC Section 4121 file a claim to recover an overpayment of FET?
  13. How is coal transported?

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IRS Tax Audit Manual for Coal Excise Tax Edition

TABLE OF CONTENTS

  • Chapter 1
    • Introduction
    • Black Lung 1-1
    • Imposition of Coal Excise Tax 1-1
    • Issue Identification 1-2
    • Background Information 1-2
  • Chapter 2: Examination Issues, Techniques, and Law
    • Issue 1
      • Excess Moisture Deduction Issue 2-1
      • Explanation 2-1
      • Law 2-1
      • Techniques 2-2
      • Conclusion 2-4
    • Issue 2
      • Producer versus Contract Miner Issue 2-4
      • Explanation 2-4
      • Law 2-4
      • Techniques 2-5
    • Issue 3
      • Sales Price Inclusive of Federal Excise Tax Issue 2-5
      • Law 2-6
      • Techniques 2-6
    • Issue 4
      • Purchased Coal Issue 2-7
      • Explanation 2-7
      • Law 2-7
      • Discussion 2-8
      • Techniques 2-8
    • Issue 5
      • Transportation Costs in Sales Price Issue 2-9
      • Explanation 2-9
      • Law 2-10
      • Discussion 2-10
      • Techniques 2-11
    • Issue 6
      • Freeze Dried Additive Issue 2-11
      • Explanation 2-11
      • Law 2-12
      • Techniques 2-12
    • Issue 7
      • Raw Versus Clean Tonnage Issue 2-12
      • Explanation 2-12
      • Law 2-13
      • Techniques 2-13
    • Issue 8
      • Mix of Underground and Surface Coal Issue 2-14
      • Explanation 2-14
      • Law 2-14
      • Discussion 2-14
      • Techniques 2-16
    • Issue 9
      • Riverbed Dredging Issue 2-16
      • Explanation 2-16
      • Law 2-17
      • Techniques 2-17
    • Issue 10
      • Refuse Pile Coal Issue 2-18
      • Explanation 2-18
      • Law 2-18
      • Techniques 2-18
    • Issue 11
      • Thermo-Dryer Coal Issue 2-19
      • Explanation 2-19
      • Law 2-19
      • Techniques 2-20
    • Issue 12
      • Claim for Refund Issue 2-20
      • Explanation 2-21
      • Law 2-21
      • Discussion 2-22
  • Chapter 3
    • General Audit Techniques 3-1
  • Chapter 4
    • Sample Information Document Requests
    • (Form 4564) Non-CEP Questions 4-1
    • CEP Questions 4-2
  • Chapter 5
    • Third Party Source Materials 5-1
  • Appendix I
    • Glossary of Mining Terms A-I-1
  • Appendix II
    • Additional Reading Material A-II-1
Don’t forget – The IRS Tax Audit Manual for Coal and Excise Tax is tax deductible as a business expense!