New source of federal revenue: tax private use of work cell phones

By John Cox on Thu, 06/11/09 - 4:37pm.

The IRS has discovered its own way to help close the ballooning federal deficit: arbitrarily classify as personal 25% of an employee's use of a company-issued cellphone, and therefore subject to tax as a fringe benefit.

According to the Wall Street Journal, it's one of several options the IRS unveiled this week dealing with the tax treatment of such phones. Today, the value of these cellphone services have to be included in a worker's gross income, unless the user proves with detailed records that it's used only for work purposes.

According to the Journal, the options are apparently an attempt by the IRS to simplify the existing 20-year-old law "that classifies work cellphones as a fringe benefit subject to personal income tax." (Carriers and CTIA, an industry trade group, have been pushing efforts to repeal the law entirely, arguing it never contemplated the widespread use of cellphones for business.)

Thus, one IRS idea is a "safe harbor" provision that would simply designate 75% of cellphone usage to be for work, creating a standard limitation on employer deductions and a potentially simpler way to tax the value of the 25% of personal use for the employee.

Other options include having employees show proof that they have a separate personal cellphone available during work hours; designating a set of minutes for "minimal personal use"; and use of statistical sampling by employers to determine how much of their employees' cellphone use is personal.

The public has until September 4 to comment on these proposals.

"The effect on cellphone companies of strict IRS enforcement of the provision could be substantial. For example, companies wishing to avoid problems during audit with IRS could cancel company-wide wireless contracts, and begin reimbursing employees for a portion of their own cell service contracts," according to the Journal.

The story cites the example of some universities, including the University of California system, that have had to cough up additional payroll taxes because they couldn't demonstrate to IRS auditors that their staff used cellphones only for work.

Higher education and other groups long have been seeking relief from, if not repeal of, the whole requirement. A repeal bill introduced in Congress last year stalled but it's been reintroduced in both the House and Senate.

What say you? Should work cell phones be taxed for personal use? Take the poll....