IRS Considers Taxing Personal Use of Work Cell Phones

By MARTIN VAUGHAN

WASHINGTON -- The IRS is weighing a proposal to deem one-quarter of employees' use of work cellphones as personal use and therefore subject to tax as a fringe benefit.

The proposal is one of several options the IRS put forward this week on the tax treatment of employer-provided cellphones. Current law already requires that the value of those cellphone services be included in a worker's gross income, unless the employee keeps detailed records showing that the cellphone is used for work only.But as a practical matter, many companies don't enforce the record-keeping requirements. The IRS proposals from this week aim to simplify the requirements and aid enforcement of the law.

The IRS notice might re-energize an effort by cellphone companies such as Verizon Communications Inc. and Sprint Nextel Corp. to repeal the 20-year-old law that classifies work cellphones as a fringe benefit subject to personal income tax.

The IRS in the past couple of years has begun to question employer deductions for cellphone services during tax audits, said Jot Carpenter, vice president of government affairs for CTIA-The Wireless Association, a trade group of cellphone equipment manufacturers and service providers.


Mr. Carpenter has been pressing lawmakers to repeal the requirement, arguing that the current widespread use of cellphones for work wasn't contemplated by the 1989 law, which targeted "CEOs and rich people."

"The idea that you should keep a log saying, 'I made a call saying I will be late for dinner again,' that's a totally cumbersome and burdensome requirement that most employers and employees are not going to comply with," said Mr. Carpenter.


The IRS, in a Monday notice, proposed options intended to simplify the requirement for employers. One proposal is a "safe harbor" that would deem 75% of work cellphone usage to be for work, and 25% to be personal. Under that scenario, employer deductions would be limited accordingly and employees would be taxed on the value of the personal use.

As an alternative approach, employees could satisfy the requirement by showing proof that they maintain a personal cellphone for use during work hours. Or, IRS could set a certain number of minutes that would be considered "minimal personal use" and thus disregarded for tax purposes.


In a third option, employers could use statistical sampling to determine what portion of their workers' use of cellphones is personal and how much work-related.

The IRS will accept comments from the public regarding the proposals until Sept. 4.


The effect on cellphone companies of strict IRS enforcement of the provision could be substantial. For example, companies wishing to avoid problems during audit with IRS could cancel company-wide wireless contracts, and begin reimbursing employees for a portion of their own cell service contracts.

Cellphone companies say that because rates have declined so dramatically in the past decade, and night and weekend calls are free under many plans, it doesn't make sense for the IRS to go after an employee benefit that may amount to nickels and dimes.


"This is a regulation from a bygone time, dating back to the infancy of the cellphone business, and it is in desperate need of updating," said Howard Woolley, senior vice president with Verizon Wireless.

Mr. Woolley said the IRS proposals this week, while welcome, still might burden small businesses. Verizon will continue to press for repeal of the 1989 law, he said.


The IRS didn't respond by publication time to requests for comment on this story.

Besides wireless companies, a diverse coalition including local government groups, college administrators and farm groups is seeking legislation to remove cellphones from the types of property that are taxable fringe benefits, in the absence of strict record-keeping.


Such legislation sponsored by Reps. Sam Johnson (R., Texas) and Earl Pomeroy (D., N.D) passed the House in 2008 but stalled in the Senate. Those lawmakers and Sens. John Kerry (D., Mass.) and John Ensign (R., Nevada) have introduced similar bills this year.

Some universities, including the University of California system, have wound up owing additional payroll taxes because they couldn't substantiate, on IRS audit, that their employees use of cellphones was for work only.


Mr. Johnson said in a statement to Dow Jones Newswires that the IRS proposals don't simply record-keeping enough. "Instead, the Congress should repeal, once and for all, this outdated and costly record-keeping requirement," he said.