IRS will not go after airline fare hikes

Planes take off and land at Washington's Reagan National Airport in Alexandria, Virginia, August 4, 2011.

WASHINGTON (Reuters) - The government does not plan to go after more than $400 million in airline revenue from fare increases that were facilitated by a two-week ticket-tax holiday resulting from a congressional dispute over aviation funding.

The Internal Revenue Service said on Friday it did not intend to seek retroactive payments from passengers or airlines relating to taxes that were not collected during a partial shutdown of the Federal Aviation Administration.

Consumer advocacy groups and some in government sought to shame the airlines, including American Airlines, Delta Air Lines, United Airlines, Southwest Airlines and US Airways, into ending fare hikes that were imposed soon after the 7.5 percent ticket tax was suspended.

"What do they do the minute that they're not required to remit those fees to the government?" said Robert Mann, a former airline executive who is now an industry consultant. "They internalize them and make them part of the fare, which, of course, has the same effect, because out of pocket the customer is paying the same price."

President Barack Obama said this week it would not be easy "to get that money back."

The ticket tax, which amounts to about $30 million per day in receipts, funds a federal trust account the FAA uses to help pay its bills.

The requirement for tax collection was suspended during the FAA shutdown, which was caused by a congressional impasse over legislation to temporarily fund the agency.

The congressional standoff, which affected some 70,000 jobs related to airport construction and nearly 4,000 FAA positions that were placed on furlough, ended on Friday when Obama signed a stop-gap spending bill approved by the Senate earlier in the day.

Airlines have until Monday to restart ticket tax collections. The airlines were unapologetic about capitalizing on the tax holiday and stood to make more than $1 billion had the standoff run until Congress returned in early September from its month-long recess.

The main trade group for the industry, the Air Transport Association, said in a statement that it would defer to the IRS on any decision regarding the collection of ticket taxes.

Lawmakers will immediately have to consider another stop-gap spending bill for the aviation agency when Congress resumes in September, possibly reviving the ticket tax issue.

The IRS decision followed a letter to the agency from senior members of congressional tax writing committees, urging the agency to consider the impact on consumers and the airlines taxes are collected retroactively.

Additionally, the IRS said passengers who bought tickets before the shutdown -- paying the 7.5 percent tax -- and traveled during it would not be entitled to any refunds, which could have totaled about $60 per ticket.

(Additional reporting by Donna Smith and Kyle Peterson; Editing by Bill Trott)