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The IRS' cellphone disconnect

Employers are on the hook for back taxes if workers fail to log personal usage. Critics call the rules outdated.

July 28, 2008|Jim Puzzanghera | Times Staff Writer

WASHINGTON — Small, cheap 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, including the University of California system, 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.

Times and technology have changed. Federal tax rules have not. The Internal Revenue Service still considers cellphones to be a pricey fringe benefit and has started enforcing regulations beginning in 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 requires employees to keep detailed records of all calls made on their work-issue cellphones, indicating whether they were business or personal. If they don't, the phone and wireless service are deemed a perk that must be listed as taxable income to the employee.

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

UCLA, for example, was hit with a $239,196 bill this year after IRS auditors found that employees with cellphones were not keeping logs. UC 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.

At UC, about 13,000 employees, or 8% of the workforce, had university-paid cellphones in 2007, at a cost of about $9 million. Nationwide, about 5.5 million people have cellphone service paid for directly by their employers -- and they are a group that makes up 2.4% of all wireless subscribers, according to research firm M:Metrics Inc.

To follow the law strictly, each user of a work-issued phone would have to provide his or her employer with a detailed list of all personal calls. But keeping such records for the three years that accountants recommend storing tax-related documents is daunting, said Matthew Hamill, senior vice president of the National Assn. of College and University Business Officers.

Although some universities have started such record keeping, Hamill said, others have opted for stipends to employees to buy phone service.

UC is considering halting its practice of issuing cellphones to most employees. Instead, the university system would give them monthly stipends to buy their own handsets and service. But the stipends would be taxable -- and employees would have to pay money out of their pockets for phone service they once got for free as part of their jobs. (UC is considering giving its employees a slightly larger stipend to cover the tax liability.)

But UC has put the proposed changes on hold as Congress considers removing cellphones from the IRS list of fringe benefits. Reps. Sam Johnson (R-Texas) and Earl Pomeroy (D-N.D.) sponsored legislation to remove cellphones from that list. It passed the House this year, and a similar bill sponsored by Sens. John F. Kerry (D-Mass.) and John Ensign (R-Nev.) is pending in the Senate.

The cellphone tax law was set "in 1989 when cellphones were huge and when it cost a lot of money to make a phone call," Johnson said. "Nowadays they're a dime a dozen and the cost is way down. 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. When pressed by Johnson at a hearing this year, Treasury Secretary Henry M. Paulson said that updating the rules sounded "like the right idea to me." And the IRS' Advisory Committee on Tax Exempt and Government Entities, calling the rules "burdensome for any employer," recommended last month that the agency loosen reporting requirements for employers and that Congress change the law.

The IRS declined to comment for this article.

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