Dialing Up Trouble: IRS Tries to Enforce Cell Phone Fringe Benefits

Cell phones are changing the world. A few years ago, I called my mother in the afternoon on my cell phone - to my carrier, a minute was a minute no matter when you called. I remember vividly my mother’s response.

“It must be nice,” she said, “to be so rich that you can call in the middle of the day.”

My mother and the IRS were, at the time, operating with the same outdated information. At least my mother has gotten up to speed - she now has a cell phone and occasionally, even reads a text message from me (Mom, the phone does have a “reply” feature - just saying).

But the IRS? Different story.

According to the Los Angeles times, the IRS has decided to enforce a rule from 1989 that requires that employers that hand out cell phones to their employees report the cell phones as a taxable benefit. The same law requires employees to keep detailed records of all calls made on cell phones issued by employers which indicate which calls are business and which calls are personal.

Oh yeah, cause that’s efficient (insert proper amount of sarcasm here).

Nationwide, about 5.5 million people have cell phone service paid for directly by their employers. That’s a lot of fringe benefit as far as the IRS is concerned.

What the IRS doesn’t seem to grasp is the relatively limited value of the phones - and the costs per minute of cell calls. The average cost per minute that most employees use is relatively minimal compared to the total use of the phone. And yet the IRS still insists on enforcing this outdated and irrational rule.

Who gets it? Brace yourself… Apparently Congress. Congress is currently considering a bill to removing cellphones from the IRS list of fringe benefits. The bipartisan sponsored litigation passed the House earlier this year and a similar bipartisan bill, this one sponsored by Sen. John Kerry (D-MA) and Sen. John Ensign (R-NV), is pending in the Senate.

Rep. Sam Johnson (R-TX), who along with Rep. Earl Pomeroy (D-ND), sponsored the House bill may have said my favorite tax quote of the year. He claims that the rule is outdated and unreasonable, saying about cell phones:

Nowadays they’re a dime a dozen and the cost is way down. If you don’t log all your telephone calls, you’re going to have some IRS weenie after you. That’s why we’re trying to get the law changed — because it just doesn’t make any sense anymore.

Ah, logic. And the use of the word “weenie” by a Representative. It makes the tax world worthwhile.

The bill is expected to pass - though you might want to give your Senators a nudge.

Eliminating the tax would result in some lost revenue. The Congressional Budget Office estimates that it would cost the federal government $237 million in lost revenue over the next 10 years - or approximately 1/3 the amount that we spend in one day in Iraq.

From an administrative perspective, the costs that are saved by the IRS and the employers to keep track of this mess have to be significant. And if it doesn’t pass - but the IRS decides to chase the employers anyway - who really stands to lose? Think about it… do you really think that companies are going to take away employee phones? Of course not. They’ll just take the tax hit. And who will they pass along that hit to? Yep, that’s right. You and me.