IRS eyes taxing your work mobile phone

Is that work issued BlackBerry really a taxable "fringe benefit?" The IRS seems to think so and is looking for ways to improve compliance of a tax that has been on the books for two decades.

The Wall Street Journal on Friday highlighted an IRS notice (Notice 2009–46, pages 13-15) June 8 detailing plans to tax company issued mobile phones. The Journal calculates:

The Internal Revenue Service proposed employers assign 25% of an employee's annual phone expenses as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax.

The Journal picked up the story after following a few blogs such as The Finance Buff and various CPA blogs.

At this point, the IRS is seeking comment on how to better enforce a 1989 tax law. In a nutshell, workers that use company phones for personal calls are supposed to count those calls as income and pay taxes. That approach may have made sense in 1989 when mobile phones were the size of netbooks, but work life has changed a good bit. In fact, work and life are completely blurred.

The IRS writes:

If an employer provides a cell phone to an employee, and the employer acquires and pays the costs of using the cell phone, the employee receives a fringe benefit. To the extent that the employee uses the employer’s cell phone for business purposes, the fair market value of such usage qualifies as a working condition fringe benefit excludable from the employee’s gross income and the cell phone expense is a deductible business expense for the employer, provided that the substantiation requirements of § 274(d) are met. However, to the extent the employee uses the employer’s cell phone for personal purposes, the fair market value of such usage is includable in the employee’s gross income.

To better tax your work mobile phone the IRS proposed three approaches:

• A claim of minimum personal use: An employer could claim the entire use of an employer-issued phone is used for work. The rub: The employee has to provide the employer with "sufficient records." In other words, call your wife and you're toast. The other option here is some minimum personal use quota so you could call the family---a little.
• A safe harbor: The IRS is proposing that a mobile phone has to be used 75 percent of the time for business to elude the tax man.
• Statistical sampling: Employers could use statistical sampling to gauge personal use of mobile phones.

Needless to say that this little IRS proposal is likely to get a lot of comments from companies and the wireless industry. It seems like a waste of time. Don't we have more important things to do than count how many personal calls are made on a business phone? And if you really want to get complicated just imagine how the IRS will count Tweets and text messages from a work phone.

The comment period ends Sept. 4.