Friday, June 19, 2009

Your cell phone as income

From the 22 June 2009 Greater Niagara Newspapers

By Bob Confer

Cell phones have become a ubiquitous part of the workday. Many businesses give them to their sales and service personnel so they can be in constant contact with their coworkers and customers. Cells have become as equally popular in the public sector as many municipalities use them to deploy and keep tabs on their work crews. Recent estimates show that more than 6 million Americans are provided cell phones by their employers.

According to the Internal Revenue Service, that’s 6 million people who should be paying an income tax for that work tool. A law on the books since 1989 empowers the IRS to collect income taxes on cell phones, putting them in the listed property category along with the likes of company-provided vehicles. In their eyes, a cell phone easily lends itself to personal use so a portion of its cost should be designated as a perk for that employee.

Back in the early-1990’s it was a tax that was relatively-easy to enforce because, back then, cellular phones were clunky, expensive luxury items that few small businesses or the self-employed could afford. But the times have changed. Developments in technology have made the phones truly portable and affordable so, now, a great many employers issue them to their workers. Some have even abandoned landlines entirely.

Despite that explosion in cellular usage, tax collections have been lethargic. Most employers are unaware that a portion of a work-related cell phone is taxable, so the IRS has not seen the revenues that should be expected. The agency has been making it a point to change that of late, motivated by the almighty dollar. Since the start of the recession the federal government has brought in less money due to job cuts and shortened workweeks. To make up for that loss of income, the IRS has directed its staff to focus on fraud and lesser-known taxes like this one. So, they have been looking at cell phone policies of businesses, universities, and municipalities with a fine-tooted comb since late-2007 and made examples of some well-known entities including UCLA (which they charged $240,000 for back taxes) and the city of Columbus, Ohio which settled with the IRS for $400,000.

This recent venture has proven to be problematic for both the IRS and those it hopes to collect from. Most employers and employees are ill-prepared to track cell phone use (and, quite frankly, there are more important things to do) and the modern way of billing – the all-inclusive, unlimited packages provided by Verizon, Sprint and the like – makes cost segregation near impossible.

The IRS has some ideas for addressing those problems. Two weeks ago they opened a public comment period (running until September 4) for individuals to offer their two cents about three distinct tax recording and collecting methods the IRS thinks might work. Under the first scenario, your cell phone can be fully-designated as a work phone and therefore non-taxable to you only if you can provide substantial evidence that shows you have a second phone for personal use and that you have not used the work phone to place a personal call. The second concept would assume that anyone who has a work phone must use it at home, too, so they would be charged a rate equal to 25 percent of the phone’s fees, regardless of how true the assumption may be. The third IRS plan would force the employer to use statistical sampling to calculate the billable rate for the employee.

It is suggested that you not engage the IRS in this discussion. Unless you like paying taxes you should instead train your public comments upon Congress. Last Tuesday, following the outcry over the IRS’s announcement, the Obama Administration, through IRS Commissioner Doug Shulman nonetheless (can you sense the irony and hypocrisy?), asked that the law be repealed because the way we communicate has changed significantly making the law outdated and almost unenforceable. Some in Congress agree with the President and bills have been introduced by John Kerry in the Senate (S.144) and by Sam Johnson in the House (H.R.690) asking for the removal of cell phones from the listed property category.

Take the time to write your senator or congressperson about this simple issue that could become a complex one if the IRS focuses on your and your employer’s pocketbooks. Not only will you have to pay taxes for the phone, but you and your employer will have to waste time (that probably costs more than the taxes paid) on recordkeeping for this law. It’s a headache financially, and philosophically, too: Why pay an income tax on something you need to do your job?


Anonymous said...

It bears repeating that this “listed property” conundrum for employers is not confined only to cell phones.

Laptop computers fall into this very same category (U.S. Code Title 26/Subtitle A/Chapter 1/Subchapter B/Part IX/Section 280F(d)(4))

Bob Confer said...

I agree. I also think that the same logic centered around modern communication & cell phones should apply to laptops as well and employees should not be charged taxes for them.