University’s Cell Phone Policy Wards Off IRS Probe
April 2, 2007 (Vol. 28, No. 7)
Just as a crucifix might save you if you’re ever attacked by vampires, you might want to have your cell phone policy handy in case your enterprise gets visited by IRS agents. And given the recent brush with the IRS at Weber State University, in Ogden, Utah, don’t sweat the vampires.
It was during a routine audit in the second quarter of 2006 that the IRS asked for Weber State’s policy on cell phone use, recounts Barbara LeDuc, the university’s telecom manager. The school had just completed a six month project of moving all 900 of its cell phones from corporate to personal liability – an atypical move.
To LeDuc’s relief, however, the agents were satisfied with the university’s new approach and didn’t ask to review all phone records. If they had, they no doubt would have been looking for examples of personal cell phone calls paid for by the enterprise – a practice declared a taxable benefit in 1989.
Many telecom managers have grown cavalier in the years since the last confirmed case of an IRS agent questioning an enterprise about employees’ personal use of corporate cell phones [VR 9/20/04]. As one telecom manager put it, “You’ve probably got about as much chance of winning the lottery.”
But Weber State’s experience isn’t isolated, and not-for-profit enterprises in particular should take care. The focus on personal use of corporate cell phones is part of a broader IRS initiative to examine employee benefit policies at tax-exempt organizations that the agency has undertaken in the past couple years, confirms IRS spokesman Eric Smith.
For-profit enterprises ought to perk up their ears, too. The IRS categorizes business-owned cell phones as “listed property,” meaning they are “obtained for use in a business but designated by the Internal Revenue Code as lending themselves easily to personal use.” In other words, you have to record the business and personal usage of the devices and treat personal use as contributing to taxable wages, says tax attorney Donna LaValley, contributing editor to J.K. Lasser’s annual tax guide.
Many have questioned why personal use of corporate cell phones is a taxable benefit when personal use of corporate desk phones isn’t. It’s because you can’t bring your desk phone home with you, so the potential for personal use is lessened, LaValley reasons.
Taxation of Stipends Depends on Justifying Biz Use
The good news is that ignoring the cell phone regulation won’t trigger an audit, says tax attorney Alvin Brown, who formerly worked in the IRS’ Office of the Chief Counsel but now runs Alvin Brown & Associates, in Fairfax, Va. “The IRS is only going to look at this in the context of something else,” he says.
Some are more skeptical: “If the IRS finds this is an easy way for them to make money, they’ll go after it,” contends telecom consultant Gary Eckert, president of Telytics, in Carlsbad, Calif.
Regardless, the IRS could use noncompliance with the cell phone regulation as leverage to get your enterprise to cave on other issues during an audit, warns tax expert Harold Hancock, editor of Federal TaxExpert, a tax research service produced by Rockville, Md.-based Kleinrock Publishing, a division of CCH.
You do have alternatives to breaking out the highlighter and asking employees to identify each personal call every month. Here’s what Weber State did:
Option #1: Cell phones are personally liable and the enterprise gives end users an allowance to cover business use.
This policy recently passed IRS muster, WSU’s LeDuc reports. End users are compensated for the business use of their phones through a stipend included in their paychecks, the telecom manager says.
The amount of the stipend is determined yearly in a meeting between the employee and his or her supervisor in which they go over bills and determine how much, on average, is business usage, LeDuc says. The number of bills scoured in these meetings is up to the supervisor, and most stipends range from $25 to $40 monthly, says LeDuc, who believes business usage is likely lower at a university than other industries. Employees are invited to seek out additional reimbursement for any month in which their business use exceeds the norm.
Some employees weren’t happy that they had to take responsibility for their phones, though others jumped at the opportunity to get on family plans, she reports.
Whether your end users should be taxed for stipends depends on how justifiable the business use is, explains Dallas-based independent tax consultant Will Yancey. If the stipend is given to every employee without regard for need, “that creates the impression that it’s a salary supplement,” and requires taxation, Yancey says. If your enterprise is more selective with its stipends – say biology professors who work in the field get a stipend but math profs who work on campus don’t – then you have an argument for not taxing the employees because it’s not a salary supplement, he says.
Dino Kusulas, telecom manager for the Brooklyn (N.Y.) Public Library, is pondering a slightly different approach. Keeping the phones corporate-liable but giving end users a stipend for personal use would allow his department to retain the ordering and payment control over the library’s phones that it worked so hard to achieve.
But Kusulas anticipates any change will be a hard sell to employees, who might see it as a burden or an intrusion. And he’s concerned that if he gives a stipend, users will fall victim to the “human compulsion” to squeeze as much usage from their allowance as possible.
Whether end users would be taxed under this method depends on how much of a stipend they get, says Ron Babich, former controller at Western Savings & Loan, now an independent tax consultant in Phoenix, Ariz. An argument could be made for not taxing the employee if the stipend represents an insignificant part of his or her phone usage.
When Personal Use is Taxable to Employee
Option #2: Cell phones are corporate-liable and personal use is highlighted on phone bills. The expenses for personal use are taxable to the employee.
That’s the policy in place at the University of Notre Dame, in South Bend, Ind. Here’s how the university worded a form that end users need to sign every month, which Babich says is almost verbatim from IRS doctrine:
“I verify to the University of Notre Dame that I have maintained adequate and contemporaneous support documenting my business and personal usage of the cell phone invoice indicated below which is being paid on my behalf… I have determined the appropriate allocation of this bill between business and personal use, with the understanding that the business portion is excludable from my income as a working condition fringe benefit. The portion of the phone bill I have indicated as ‘personal’ will be included as additional taxable income to me for the current year.”
Option #3: No effort is made to identify personal and business use of a corporate-owned cell phone. The entire cost of the phone, plus the cost of the service plan, is taxable to the employee.
“Unless the employer has a policy requiring employees to keep records, or the employee does not keep records, the value of the use of the phone will be income to the employee,” says the IRS’ Web site.
While not documenting anything might sound like the path of least resistance, don’t underestimate the wrath your most nit-picky end users could unleash when they realize they’ve been taxed for the entire value of their corporate-liable phones, Yancey says.
When Personal Use is Not Taxable to Employee
Option #4: No personal use of corporate-owned phones allowed.
That’s the policy at Le Moyne College, in Syracuse, N.Y. Here’s an excerpt:
“Employees assigned a College cellular telephone shall use it for necessary and official business-related purposes… In all cases where personal use is unavoidable, the call should be kept to a minimum and every attempt to utilize other methods of telecommunications should be suggested and exercised… The IRS may impose an income tax and/or penalty against an employee who they determine through a business audit have violated this code. Employees who anticipate the making and/or receiving of personal use calls on a College cell phone are strongly encouraged to obtain their own personal cellular telephone service.”
This route would force end users to carry two phones if they want to make personal calls, a behavior that’s more common in Europe than it is in the United States, Yancey says. Anticipate push-back from your end users if you try this route, he says. It would be especially tough to convince “on call” end users to carry their phones with them on weekends and vacation if they can’t use it for personal calls, Yancey says.
Option #5: End users reimburse the business for all of their personal use of corporate-owned cell phones.
That’s one of the options end users have at the University of Idaho, in Moscow, Idaho. Here’s how the policy is worded: “Employees must reimburse UI for personal use of UI cell phones… Personal use that goes beyond incidental or emergency use will result in discontinuation of the cell phone contract or agreement, require reimbursement to UI for non-emergency and non-incidental personal use or other inappropriate charges, and may be cause for disciplinary action… Each employee issued a cell phone and/or using office long-distance call capability is subject to periodic review by the responsible department head and/or Accounts Payable or Auditing Services. This includes review of monthly invoices and questioning of any personal or large and unusual charges.” (