Work cellphones trigger tax

WASHINGTON — Small, inexpensive cellphones have become ubiquitous in the workplace. But federal tax rules governing them date to the days of big handsets, big bills and big hair.

Major employers have been hit with bills for hundreds of thousands of dollars in back taxes for violating the anachronistic laws. If the rules aren't changed, many employers say they will stop handing out cellphones to their workers.

The problem stems from the tax code's inability to keep up with technological advances.

When the makers of the 1987 film "Wall Street" wanted to convey corporate raider Gordon Gekko's power and success, they gave him one of the era's most exotic executive perks: a cellphone.

The Motorola DynaTAC 8000X that actor Michael Douglas carried as he strolled along the beach was roughly the size of a brick and cost $3,995 when introduced three years earlier. A call during peak times cost upward of 50 cents a minute.

The Internal Revenue Service (IRS) still considers cellphones expensive fringe benefits and has started enforcing regulations from 1989. That's when Congress decided that mobile phones should be treated like company cars and other executive perks: Their personal use qualifies as extra compensation.

The law said that employees must keep detailed records of all calls made on work-issue cellphones, indicating if the calls were business or personal. If they don't, the phone and wireless service count as a perk that must be listed as taxable income.

Most employers were unaware of the cellphone rules until the past few years, when the IRS began requiring additional taxes to cover the value of the cellphone service provided to employees.

The University of California, Los Angeles, for example, was hit with a $239,196 bill this year after IRS auditors found that employees with cellphones were not keeping logs. The University of California, San Diego had to shell out $186,471 for the same reason.

"It's completely unreasonable to have to keep track of calls at that level," said Mike O'Neill, payroll and tax manager for the UC system. "Especially as the costs of these devices have come down, you can get these mega-minute plans where there's really no additional cost [for personal calls]."

UC is considering halting its practice of issuing cellphones for most employees. Instead, the university system would give them monthly stipends to buy handsets and service. The stipends would be taxable, however, so employees would have to pay out of their pockets for phone service that they once got for free as part of their jobs.

UC has put the proposed changes on hold as Congress considers removing cellphones from the IRS list of fringe benefits.

Rep. Sam Johnson, R-Texas, and Rep. Earl Pomeroy, D-N.D., sponsored legislation to remove cellphones from the list. It passed the House this year, and a similar bill, sponsored by Sens. John Kerry, D-Mass., and John Ensign, R-Nev., is pending in the Senate.

The cellphone tax law was set "back in 1989 when cellphones were huge, and when it cost a lot of money to make a phone call. Nowadays they're a dime a dozen and the cost is way down," Johnson said. "If you don't log all your telephone calls, you're going to have some IRS weenie after you. That's why we're trying to get the law changed — because it just doesn't make any sense anymore."

A change appears likely. Pressed by Johnson at a hearing this year, U.S. Treasury Secretary Henry Paulson said that updating the rules "sounds like the right idea to me." And the IRS' Advisory Committee on Tax Exempt and Government Agencies, calling the rules "burdensome for any employer," recommended in June that the agency loosen the reporting requirements for employers and that Congress change the law.

The IRS declined to comment.

Although universities and governments have felt the sting of the increased rule enforcement, businesses largely have been left alone. Still, several business groups back the legislation to overturn the tax law.

"No one's complying with the law," said Thomas Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, which represents 350,000 CPAs and supports changing the rules. "It's patently ridiculous."

The Congressional Budget Office has estimated eliminating the cellphone rule would cost the federal government $237 million in lost revenue over the next 10 years.

But the wireless industry contends that changing the rule is a matter of fairness. Said Jot Carpenter of CTIA-The Wireless Association, an industry trade group, "If somebody's making a personal call and you're under your bucket of minutes ... I would argue the cost of a free minute should be nothing."