IRS, Treasury want cell phone tax repealed

Company-issued cell phones might feel like a tether to the office even in workers' off-hours. The phones also are a taxable fringe benefit, and the Obama administration wants to change that.

The administration has asked Congress to repeal the widely ignored tax on the personal use of company cell phones, saying it is outdated and difficult to enforce. The request Tuesday came a week after the Internal Revenue Service caused an uproar when it sought ideas for how better to enforce the law.

A 1989 law says workers are supposed to count the value of personal calls on a company cell phone as taxable income. The cell phone tax, however, can be a pain for workers who increasingly use mobile devices for texting, e-mailing and browsing the Internet - sometimes for work, sometimes for personal use.

"There's been very uneven enforcement, said Marianna Dyson, a former IRS lawyer who now is an employment tax and fringe benefits expert with Miller & Chevalier in Washington.

"I think most employers are reasonable. But do I see employers requiring employees to document every single business call?" Dyson said. "It's administratively burdensome."

IRS Commissioner Doug Shulman said the tax is "poorly understood by taxpayers," and acknowledged it was difficult to enforce consistently.

"The passage of time, advances in technology and the nature of communication in the modern workplace have rendered this law obsolete," Shulman said in a statement.

Shulman said he and Treasury Secretary Timothy Geithner were asking Congress to repeal the tax. The House passed a bill to repeal the tax last year, but it stalled in the Senate. This year, bipartisan bills have been introduced in both chambers.

"We need to modernize the laws to reflect the reality that cell phones, BlackBerrys and text messaging are an everyday extension of the workplace and are here to stay," said Sen. John Kerry, D-Mass. "Cell phones are no longer executive perks or luxury items, and our tax code cannot treat them that way anymore."

Just last week, the IRS issued a request for comments on ways to improve compliance with the law. One option suggested by the IRS would assume that personal use accounts for a quarter of the phone's overall use. Another would require workers to document their personal use of company cell phones.

Shulman denied that the IRS had been trying to "crack down" on workers who don't pay the tax. Instead, he said, the IRS was "attempting to simplify the rules and eliminate uncertainty for businesses and individuals."

Some employers have faced big tax bills after failing to comply with the law.

In 2008, the IRS audited two University of California branches, in Los Angeles and San Diego. As part of a settlement, UCLA paid a tax assessment of $238,474 and UCSD paid $186,471.

Industry representatives said they were pleased that the IRS changed its position.

"We just think that this law was put into effect in a bygone era," said John Walls, vice president of public affairs for CTIA-The Wireless Association, a trade group.

"In 1989, cell phones were considered a luxury item that were actually referred to as car phones," Walls said. "Now, we have unlimited calling on our cell phones. We have free nights and weekends. The company is not even paying for that. Why should I get taxed for that?"