Tax Edge

By Robert Steere, Toolkit Staff Writer

Whether they are rushing along Wall Street or strolling down Main Street USA, today's business persons can be seen perpetually linked to their offices and customers--and their friends and families--via their cell phones, blackberries and other mobile communication devices. Often, the phones in question belong to their employers. But they use these employer-provided devices oblivious to the law that classifies employer-provided cell phones as a taxable perk and requires employees to treat the value of personal use as taxable income.

Oh, you didn't know that in 1989 Congress passed a law requiring the value of an employer-provided cell phone to be included in an employee's gross income unless detailed records are kept to show that the phone was used only for work? Well, it seems that most employers didn't know, either, or at least they had conveniently forgotten through the years to maintain the appropriate, though tedious, records.

The IRS, wanting to put an end to all this shameless noncompliance, presented for public comment on June 8 a handful of proposals intended to simplify the law and standardize the tax treatment of employer-provided communication devices. Confusion arose among the business community whether the IRS was intending tougher enforcement of the current rules. In response, IRS Commissioner Douglas H. Shulman announced on June 16 that the IRS supports easing the current compliance obligations for employer-provided cell phones, and that the IRS proposals were aimed at simplifying the substantiation rules, not at cracking down on noncompliance.

"Some have incorrectly implied that the IRS is cracking down on employee use of employer-provided cell phones," Commissioner Shulman said in a statement. "To the contrary, the IRS is attempting to simplify the rules and eliminate uncertainty for businesses and individuals."

Moreover, Shulman, on behalf of the Obama Administration, called on Congress to amend the law in order to eliminate the tax consequences resulting from personal use of employer-provided cell phones. He said, "Treasury Secretary Timothy Geithner and I ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers."

In a letter sent to Capitol Hill last month, a number of industry associations argued that the record-keeping requirements of the law are a burden to companies small and large. Many look at the current IRS strategy (and the law) as an unreasonable means of "nickel-and-diming" employees for the indirect benefits of possessing an essential tool for conducting business. In fact, the billing methodologies in the wireless industry are not conducive to allocation between business and personal use. In many cases, the charge for phone use is a flat rate up to a certain limit of minutes, so the employer isn't paying extra for personal calls. Often, there is no charge for phone use during non-business hours (free night-time and weekend plans). Thus, as long as an employer provides the device for business purposes, it seems there is little reason to allocate any portion of the cost to personal use.

The IRS presented three compliance simplification options for consideration. The first would simply (and arbitrarily) divide usage of an employer-provided phone 75%/25% between business and personal usage. Thus, 25% of the charge would be treated as a fringe benefit included in the gross income of the employee. Under option two, if an employer receives proof from an employee that he or she has a personal cell phone to use for personal calls while working, then none of the charges for an employer-provided phone need to be apportioned to personal use. Option three would allow employers to use statistical sampling to determine the average use of employer-provided cell phones for personal calls, and to apportion the costs accordingly.

The IRS is seeking comment on the proposals until Sept. 4. However, it seems that they, too, would prefer for Congress to act so that they needn't bother with this burdensome compliance issue anymore.

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Posted June 25, 2009.