The IRS is fighting back on the cell phone issue – only someone forgot to call their PR person first.

As blogged earlier, the IRS has asked for feedback on its proposal to set more specific rules for the taxation of personal use of cell phones. The current rules require the entire “value” (whatever that means) of the cell phone to be reported as income to the employee unless the employee can provide records which justify a personal/business split.

Employers have fired back that phones have been provided for the convenience of the employer, not the employee, much like a landline and it would be impossible in some cases to distinguish between personal and business usage. In particular, bundled plans or unlimited minutes packages would not be affected by personal calls – from a cost perspective, the employer pays the same amount for the entire service whether it’s used for personal use or not.

Employees have expressed concern over the idea that they may be taxed on something beyond their control. If the phones are distributed as a condition of the job, and the employee uses it solely for business use, under at least one of the provisions of the IRS’ proposal, the employee would have to report a percentage of the bill as income.

The IRS has retorted that this is not about the employees but a clarification for the employer.

I’ll grant them that the old rule is confusing and overbroad. So fixing it is a good thing. But why not eliminate it altogether?

And if you keep it, don’t try to be slick and say that it’s not about the employee. It is most definitely about the employee. It’s called the potential to collect untaxed revenue. Seriously, IRS, we get it. You want our money. Stop trying to call it something that it’s not.

The IRS has even gone so far as to claim it has been approached by some businesses wanting it clarified to make it easier to have employees pick up the tab for their personal calls. Really? And which businesses are those? Right.

I don’t think that it’s escaped notice that the economy in 1989 (when the cell phone rule was first enacted) was eerily similar in many ways to today’s economy: shaky global currencies, government bailouts, banking crisis… The IRS was looking for more money then and it’s looking again now.

No, I’m not happy about the prospect of taxing personal cell phone usage, but let’s call a spade a spade: this isn’t about helping anyone out, it’s about bringing in more money.

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Author

Kelly Erb is a tax attorney and tax writer.

Comments

  1. I understand that this debate has been revolving around cell phones because of the IRS’s recent willingness to go after this “fringe benefit” tax. However, I want to also bring into the debate another possible repercussion of the IRS’s crackdown. Cell phones are “listed property.” Because they are “listed property,” there is a presumption that they will be used for personal use (the burden is on the user to show that it was not used for personal use). There are other types of listed property. Laptops, too, would constitute listed property. Thus, there is a presumption that laptops given by an employer to an employee is a personal benefit. To the extent the employee is able to show business use of the laptop, the employee is able to deduct that much in taxes, else the employee should be adding the value of the laptop as taxable income.

    If the IRS is crackdown on cellphones, they may follow suit with other forms of listed property. What are employers/employees supposed to do with things like laptops? How does each protect himself/herself from the tax man?

  2. I don’t see a problem with the IRS’s position. Seriously, the employer provided cell phone IS another work related benefit. How much does the average cellphone plan cost most people? $50 a month. If you have an employer provided cellphone, you’re not likely to pay for a separate, personal cellphone plan. That saves you $50 a month, or $600 a year.

    Paying tax on a cellphone plan will cost you, what, $50 a year?

    And if you have your own personal cellphone, you really just need to show your cellphone bills to the IRS if they audit you. They’re not going to body check you to see if you have your personal cellphone on you at work.

    So enough with the whining.

    • I think that many people would disagree with your characterization of it as a benefit – my dad, for example, who never used his cell phone except for work and hated having to carry it around. Under at least one of these proposals, he would have been responsible for paying tax on a “benefit” that he never even used for personal use.

      The problem is that IRS is making assumptions about the use of cell phones that may be inconsistent with their other positions. That leaves them with two choices: ignore the inconsistencies or start taxing other benefits. The WSJ may be joking about the coffee but it would be easy to go down that path of what is a “benefit” at this point…

  3. The IRS is opening a can of worms. If they can say that I must pay taxes on a company provided cell phone doest that mean that if I use my personal phone (which I pay for) for company business I can deduct a similar prorated cost as a business deduction from my personal income?

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