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IRS thinking of taxing employee cell phone use

It’s not taxes, per se, that bother me. It’s the tax code. And it’s the absurd bits and pieces they keep adding to it. The latest piece to come from our beloved IRS is a proposed law that would tax the personal use portion of calls made on an employer provided cell phone. Consider what’s gained and what’s lost by such a provision. The time it will take to comply. First, let’s look at the three methods the employer may use to determine personal use.
1) Minimum Personal Use Method – An employee can show proof they have their own phone used for personal calls.
2) Safe Harbor Substantiation Method – 25% of usage is deemed to be personal.
3) Statistical Sampling Method – The employer would sample the bill and use that percentage to determine the total personal use.
All well and good, I suppose, but here’s the absurdity – as rates have dropped and unlimited use plans are below $80, we are looking at a safe harbor provision of about $20 per month or $240 per year. This is not the tax collected but the amount an employee would have to pay tax on. So about $60 if they are in the 25% bracket. All this paperwork and tracking to potentially collect as little as $60 per yr? It will likely cost the employer more than this just to implement and maintain a tracking system for this. This was made public on pages 13-15 of IRS Bulletin Number 2009-23, and the public is invited to comment via snail mail or email.
Note to IRS, this may be low hanging fruit, but there are bigger fish to catch. Unreported income from an underground economy, over $100 billion, by some estimates.

(Update – Note, The WSJ broke this story on June 12, WSJ: IRS Targets Employer-Provided Cell Phones, I beat them to press by two full business days.)


  • Terry June 14, 2009, 7:02 pm

    Technically, Congress writes the tax code and the IRS interprets it by adopting regulations, of which the one proposed here is an example.

    There is an established principle that “de minimis” fringe benefits be exempt from tax; apparently in this case, the IRS is saying that employee cell phone use has grown beyond the “de minimis” level.

    This is an example where compliance and recordkeeping requirements are burdensome relative to the benefit received and to the amount of tax potentially in question.

    This is a case where either the IRS should come to its senses and leave alone employee cell phone use, or Congress should explicitly allow it as an exempt benefit.

  • JOE June 14, 2009, 9:43 pm

    Thanks, Terry, your point 3 was what I was trying to get to, my point exactly.

  • NokiaN97 June 20, 2009, 11:08 am

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  • Business Tax Guru November 22, 2009, 10:49 pm

    I’ve been interested in taxes for longer then I care to admit, both on the individualized side (all my employed life!!) and from a legal standpoint since satisfying the bar and following up on tax law. I’ve supplied a lot of advice and righted a lot of wrongs, and I must say that what you’ve posted makes impeccable sense. Please continue the good work – the more people know the better they’ll be outfitted to comprehend with the tax man, and that’s what it’s all about.

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