Time to bite the bullet: Start requiring users of corporate-liable phones to keep logs detailing the time and purpose of every call. Or else find another way to break out personal and business calls.
Voice Report has alerted you to IRS regulations that require businesses to keep track of – and tax end users for the value of – personal calls made on corporate-liable cell phones [VR 4/24/08]. Telecom pros have long laughed off the rule as antiquated and onerous.
But enforcement isn’t just a vague threat anymore. The IRS made a whipping boy out of the University of California, San Diego in June when it ordered the school to pay $186,471 in back taxes for failing to keep logs of end users’ cell phone usage. The University of California, Los Angeles agreed in April to pay $239,196 for the same reason, the UC system’s Payroll and Tax Manager Mike O’Neill tells Voice Report.
A front-page article in the Los Angles Times made these the first well-publicized enforcement cases. It’s also a warning for your enterprise to shape up.
Tax-Exempt Organizations in Crosshairs
The fines bolster a trend that emerged as select enterprises told Voice Report their cell phone usage had been audited: The IRS is targeting non-profits, like schools. An IRS spokesman confirms the agency has undertaken an initiative to examine employee benefit policies at tax-exempt organizations [VR 4/2/07].
UC’s O’Neill speculates that tax-exempt organizations are in the spotlight because the branch of the IRS that audits these entities is focusing on employment tax audits, and hit upon the cell phone issue. But non-profits aren’t the only ones that need to worry: O’Neill says the large and mid-size business division of the IRS is starting to pay attention, too.
The two UC schools received letters from the IRS last spring announcing they would be subjected to full payroll tax audits – and specifically calling out cell phones as an area that would be under the microscope.
Bad as the six-figure settlements sound, it could have been worse. The UC schools had to pay only back federal income and Medicare taxes, not the penalties or interest the IRS could have layered on [VR 2/28/08], O’Neill says.
UC Ponders Move to Personal Liability…
About 8% of the 170,000 end users in the UC system have corporate-liable cell phones, including emergency and facilities workers, IT employees, doctors, faculty and administrators. All told, the corporate phones cost the system about $9 million annually, O’Neill says he learned while contacting wireless carriers through the course of the audits.
As a result of the IRS’ scrutiny, the UC system is on the verge of abandoning its practice of handing out corporate-liable cell phones. Devices would be converted to personal accounts and users would get stipends to cover their business usage, O’Neill reports.
The approach would relieve end users of the documentation burden, and it passes IRS muster because end users would be taxed on the stipends. The UC system would increase the amount of the stipend to cover the taxes, so reimbursing an end user for $50 of usage could cost the enterprise $75, O’Neill laments.
The UC schools aren’t pulling the trigger on the corporate-to-personal conversion just yet. The enterprise is waiting until the end of September to see whether Congress will override the IRS’ cell phone regulations.
… But Holds Out Hope for Change in Law
Cell phones were dubbed “listed property” by the IRS in 1989, adding them to a catalog of items like company cars that can be used for both business and personal purposes. See IRS tax code Section 280F(d)(4)(A)(v). (www.law.cornell.edu/uscode/search/display.html?terms=listed&url=/uscode/html/uscode26/usc_sec_26_00000280---F000-.html) Use of listed property needs to be logged and end users must be taxed for the value of their personal usage.
Two bills introduced in Congress gave enterprises hope for relief from the burdensome regulations. The House passed the “Taxpayer Assistance and Simplification Act of 2008” (H.R. 5719), which includes a provision to relieve cell phones of their listed property designation, on April 15 by a vote of 238 to 179.
Once the bill passed in the House, it was sent on to the Senate Finance Committee where it has languished. That committee also is sitting on another bill that aims to remove the listed property designation from cell phones. The “Modernize Our Bookkeeping In the Law of Employee’s (MOBILE) Cell Phone Act of 2008” was introduced in the Senate on Feb. 26 (S.2668).
For cell phones to lose their listed property title, one of these bills would have to be passed by the Finance Committee, survive a vote on the Senate floor and then a vote in a House/Senate conference committee. Then both chambers of Congress need to approve the resulting version of the bill before it can be considered by the president, a Finance Committee aide explains [VR 4/24/08].
Or the provision could be tacked on to other tax bills moving through Congress.
A telecom industry lobbyist close to the proceedings estimates there’s a 60% chance that a bill removing cell phones from the list of listed property will pass in 2008.
If not, Democratic Rep. Earl Pomeroy, of North Dakota, will reintroduce it in the 2009 legislative session, his press secretary says.
But right now Congress is focused on the November elections and other tax provisions like the alternative minimum tax, others say. The cell phone issue also might not be a top priority because, according to the Congressional Budget Office, it is expected to cost the government $237 million in tax revenue over 10 years.
4 Compliance Strategies
Don’t wait for Congress to act before bringing your policy up to snuff, warns telecom consultant Gary Eckert, president of Carlsbad, Calif.-based Telytics Inc.
The bill that passed the House would relieve your enterprise of cell phone documentation obligations for taxable years beginning after Dec. 31, 2008. The IRS still could audit your enterprise for prior periods, so you still could have business deductions invalidated or back tax liability if you aren’t compliant now. “The safer play is to make sure the proper documentation is already in place,” Eckert stresses.
Besides, the bills could fall off Congress’ radar or you could get audited in the meantime.
So how do you make sure your enterprise isn’t the next to make headlines for paying massive back taxes?
• Here’s what Eckert dubs the safest and simplest option: Institute a policy to ban personal calls on corporate devices. This method essentially forces end users to carry two phones.
• Some telecom pros think they’re covered because end users reimburse the enterprise for personal use of their corporate devices. This approach is safe only if end users keep logs to substantiate their personal usage in case of an audit, Eckert cautions.
• You also could reimburse end users for business calls made on personal devices, as the UC system is contemplating.
• Or – for letter-of-the-law compliance – you could require end users to document the time, duration and purpose of every call made and received on corporate cell phones, then add the value of that usage to their W2s. (