Not so fast: IRS backtracks on cell-phone tax

First, the IRS announced a proposal to start collecting taxes on employees’ personal use of work-issued cell phones. A few days later, the agency had a change of heart.

It wasn’t a new idea — technically, the taxes are already required. A 1989 law classifies personal use of a business phone as a taxable benefit, meaning employees are required to track their calls, text messages, and downloads, and pay taxes on the value of anything not work-related.

But the law was passed when cell phones were bulky, calls were expensive and service was limited. So hardly any employees got phones, and those who did made few personal calls.

Once cell phones became common, the IRS stopped enforcing the law. That stance looked as if it was going to change, though, when the agency unveiled a plan to collect the taxes.

To ease the administrative burden of tracking every call, the IRS came up with three other options:

  1. Consider 75% of phone use to be work-related, and the other 25% to be personal, across the board. All employees would pay tax on the 25%, regardless of how they used the phone.
  2. Let employees prove they have a personal cell phone they can use during work hours. Then they wouldn’t be taxed at all for the work-issued phone.
  3. Have employers take a statistical sampling to determine employees’ average personal use.

The IRS announced it would take public comments on the proposals until Sept. 4. But it looks like they got enough already.

Even with the three options, the proposal generated an outcry of protest from IT and accounting staffers worried about dealing with call records, HR and benefits pros concerned about one of their perks diminishing in value, and people with work-issued cell phones who don’t want to pay more taxes.

In response, the agency reversed its position. In a statement, IRS chairman Doug Shulman asked Congress to make it clear there will be no tax consequence for employees who use work-related devices for personal reasons.

He said the purpose of the proposal was not to “crack down” on collecting the taxes, but rather to simplify the rules. However, Shulman said in the statement, “the passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete,” and keeping it on the books will “inevitably leave widespread confusion among employees and businesses.”

Bills that would repeal the old law have been introduced into both houses of Congress this year. We’ll keep you posted.

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