IRS Taxes Personal Calls On Work Cell Phones

Cell phone video

Almost everyone has a cell phone these days. But if you're among the people who make personal calls on a company mobile phone, the Internal Revenue Service may want to talk with you.

The IRS puts cell phones in the listed property category — right along with company-issued motor vehicles and use of the corporate plane. And they consider little perks like cell phone calls from your work BlackBerry to be taxable as an extension of your compensation package. So either you or your employer is supposed to pay up.

The law for taxing cell phones was written 20 years ago, when the wireless industry was in its infancy and mobile phones were about the size and weight of a brick. Back in the day, if you wanted one of those big Motorolas with the 2-foot antenna (visualize Michael Douglas on the beach in the 1987 movie Wall Street), you — or more likely, your company — would have shelled out about $4,000. So of course, they were reserved for top-level executives.

Fast-forward 20 years, and now everybody has cell phones. They're smaller, lighter and faster. Instead of just calling on them, you can watch the news, listen to music and scan your e-mail. The CEO, the IT guy and the facilities manager each have one. Doctors and reporters would be lost without them. And how else would that real estate agent know whether you've blown her off or you're stuck — again — on the freeway en route to meeting her?

"The number of people in this country who depend on cell phones goes well into the millions," says John Walls, vice president for public affairs at CTIA, the wireless telecommunications industry association.

Long-standing Laws

Walls points out that once a tax law is created, it can take a good long while to amend it to reflect current reality: "I think a great example of this is the federal excise tax that was created to help pay for the Spanish-American War. That was only rescinded a few short years ago."

The government doesn't have a problem with people using the company phone to make personal calls, provided the individual or the company pays the appropriate taxes on such calls.

And that's the problem. To do that, says Michael O'Neill, manager for tax and payroll services for the University of California system, each cell user would have to submit documentation for every single call and indicate which ones were personal, so a tax determination could be made.

"The rules are really unworkable, unreasonable and burdensome," O'Neill says. "The IRS realized that most employers aren't following those rules."

Found Money For The IRS

In an economic downturn, where every government agency is looking to find new sources of income, collecting taxes for mixed use of the company cell is essentially free money. In 2007, during a routine payroll audit of UCLA, the IRS slapped the university with a bill for almost $240,000 in back taxes because it couldn't show how each phone had been used.

O'Neill says the university is now considering issuing voucher payments to all employees who need a cell phone, so that they can purchase one. This would become a taxable benefit that the employee must declare. "And that way, the tax burden shifts to the employee, and the university has no exposure, because we're giving the employee additional wages to go out and buy their own phone," says O'Neill.

Antiquated Tax Codes

That's still an accounting nightmare. "Back in the day, cell phones were considered exotic," says Ed McClellan, a partner at PricewaterhouseCoopers, one of the country's largest accounting firms. "And it was pretty easy to track them because only a few people had them. Things have changed, and the tax code needs to catch up with it."

That might happen very soon. A bill has already passed in the House amending the tax code to reflect how cell phones are used today. And it's being shepherded through the Senate by Massachusetts Democrat John Kerry — with 41 co-sponsors on both sides of the aisle.

"We think this is one of those nonpartisan issues where everybody benefits," says CTIA's Walls.

Whether you're from a red state or a blue one, whether you're a Republican or a Democrat, a reasonable tax code that acknowledges cells have moved from an executive perk to a way of life seems to be something everyone can agree on.

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