Paul L. Caron

Monday, June 15, 2009

IRS Not Backing Down From Push to Tax Employee Cell Phone Use

IPhone Following up on my prior posts (here and here):  today's Wall Street Journal editorializes against the IRS's recent notice on taxing employee cell phone usage: The IRS Phones Home:  What's Next, a Tax on Each Sip of Office Coffee?:

The IRS believes that some percentage of the costs incurred by employees using company-provided wireless devices should count as a "fringe benefit" and thus be subject to taxation. Since workers inevitably end up taking personal calls or emails, the thinking goes, it's only fair that they pay for the privilege. What's next? Maybe a per-cup tax on office coffee, or targeting furtive visits to ESPN or Hulu on the office PC? As one wag put it on the Journal's Web site, "It's like charging for the use of the company washroom." ...

The political class may come to regret stepping into this minefield, however, and not only because this is precisely the sort of common non-sense that incites tax revolts. It's one thing if the next Tom Daschle forgets to pay taxes on his company chauffeur. But it'll be quite another if the next nominee goes down for taking too many personal calls without giving the government its due.

But the Wall Street Journal also reports that IRS Defends Tax Proposal for Employer-Issued Mobile Phones, by Martin Vaughan:

The IRS defended its proposals to enforce a law that taxes personal use of employer-provided cellphones, saying the changes are aimed at helping businesses comply, not taxing individuals. ...

A senior IRS official Friday said the agency is more concerned about making sure employers deduct the correct amounts for cellphone equipment and services provided to employees, than it is about taxing those employees on benefits. ... Marianna Dyson, a lawyer at Miller and Chevalier who specializes in the taxation of employee benefits, said that as a practical matter, the IRS proposals would affect both the business and the employee.

For instance, if IRS implemented its proposal to limit business deductions to 75% of the value of the employer-provided cellphones, and deem the rest personal use, the remaining 25% would have to be counted in an employee's gross income. That would trigger both income tax and payroll tax withholding requirements on the employee's wages. "If they decide 25% is personal use, guess what? It is a wage, and you have to withhold on it," Ms. Dyson said. "For IRS to suggest this would have no impact on employees, is a little disingenuous."

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Tracked on Jun 16, 2009 8:59:52 AM


What's the need to make an analogy to coffee? If the fact that I get/send personal phone calls on my employer-provided cell phone means it should get taxed as a perk, what about the fact that I get/send personal phone calls on my employer-provided landline?

Ditto with e-mails and employer-provided computers.

Posted by: MattJ | Jun 16, 2009 6:49:00 PM

Brought to you by Timothy Geithner.

Posted by: Enough Said | Jun 16, 2009 10:38:24 AM

Perhaps some high up IRS folks are secret Tea Party members? Because there is no logical leap from taxing personal calls on the work phone (which will be taxed in apparent disregard to whether or not they are actually made) to taxing the coffee pot and toilet paper. The WSJ is right--this is the stuff tax revolts are made of.

Posted by: tim maguire | Jun 16, 2009 7:05:21 AM

My co-worker and I were dumbstrucked. These cell phone are essential business tool that also act as a leash by the companies that employed us. What's next, taxing the computer that we worked on because it's another fringe benefit?

Posted by: BigFire | Jun 16, 2009 6:56:42 AM

Some of you may be old enough to remember the IRS mileage rules of the early to mid 80s.

Unless a vehicle was used 100% for business the driver was supposed to log every single mile. Nobody qualified as 100% unless it was a heavy truck or something - stop at the carryout on the way home, 99.9%, keep a log.

The sale of clipboards exploded. Millions of employees could not do as much productive work because they were busy logging mileage. Somebody at the office had to compile all of the mileage reports. A rebellion ensued.

And then of course there was the infamous Sec 89 reforms - another riot ensued.

What is Congress up to these days? (screwing up the country rather than supervising the IRS?)

Posted by: save_the_rustbelt | Jun 16, 2009 6:30:45 AM

The IRS proposal is a typical example of static tax analysis. Almost everybody has a cellphone anyway. All the employers have to do is allow personal blackberries access to their corporate E-mail server and voila, no fringe benefit to tax. There will no revenue gain from this proposal.

Posted by: jerryofva | Jun 16, 2009 6:10:32 AM

My company's cell plan is $.06/minute voice, unlimited texting. Being of a somewhat ethical bent, I limit my voice calls to strictly company business only and use text if I need to communicate with family. If the IRS determines that I am only 75% ethical, I intend to use that 25% of calls to call the IRS help desk with deliberately obtuse questions to balance the books, so to speak.

With regard to personal income tax reporting, does the IRS intend to add a box to my W-2, or will they come up with an entirely new form for my employer to use to tell me what they spent on my cell phone? Currently it's completely transparent to me. Is the IRS going to staff an entire division to deal with tracking these charges?


Great fodder for Tea Party recruitment, though.

Posted by: Hogarth | Jun 16, 2009 5:49:39 AM

I looked at my recent bill...roughly 30% in various taxes. So aren't we already being taxed on 100% of this?

Posted by: Mac | Jun 16, 2009 5:49:14 AM