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The tax trap looming inside your employees’ corporate-liable cell phones

By Posted November 12, 2009

The following is a guest post by LB3 partner Kevin DiLallo, whose practice includes a specialty in the negotiation of enterprise wireless service contracts.

As if the high level of taxes and surcharge-generating “mandates” on wireless plans weren’t enough, enterprises also have to be concerned with a fundamental, tax-related issue relating to what their employees do with their mobile devices.

If you provide corporate-liable devices and plans to employees, and those employees use them for personal conversations and transactions, then at least in theory you are providing a taxable employee benefit. Under the law, your employees are required to log every call or Internet session on a company-subsidized device and note its business purpose (if it has one). It’s then the employer’s responsibility to report the value of this benefit on your employees’ W-2s, and it’s their responsibility to report the amount of the benefit as income.

What’s more, if you don’t have a policy requiring your employees to keep records of their personal and business calls and the business purpose for each of the latter, then you and the employees must report the full value of company-subsidized phones and service as additional income to the employees.

Are most companies complying with this requirement? As far as we know, not many, largely because of the enormous burden on them and their employees.

So is the IRS doing anything about it? The current IRS commissioner has actually gone on record as saying that the requirement to track personal usage of corporate devices is anachronistic and should be repealed. But that’s something only Congress can do, and in the meantime, the Treasury Department could pressure the IRS to go the other direction and step up enforcement as a source of badly needed federal tax revenue.

Thus the dilemma for corporate telecom managers: How does one balance the realistic risk of failing to measure this purported employee benefit against the hassle of forcing all your users to keep track of their personal usage? Surely, there must be a logical, common-sense way to ensure compliance, many users feel.

One idea we’re sometimes asked about is whether you can build a bulwark against IRS enforcement action by issuing a corporate policy banning personal use of corporate-liable devices. The answer is no — according to policy, the IRS is looking for actual logs that demonstrate how much or how little employees make personal use of their mobile devices.

But there are other developments in the works that could ease the pain of compliance:

— Some applications can be loaded on phones that require an employee to use a routine such as pressing “P” (personal call) or “B” (business call) before making any calls. Ideally, once an employee dials a number the first time and enters the appropriate code, the phone remembers what type of call it is. One vendor that offers such an application is Arizona-based Syncpointe, LLC.

— Compliance would be greatly eased with a “safe harbor” — a type of simple statement of minimal personal use that companies could adopt in place of full record-keeping. The IRS has initiated a rulemaking proceeding to solicit public comment on a safe harbor or other compliance alternatives. It’s also possible that IRS will adopt some sort of mitigating interpretation that will alleviate the burden on companies until Congress acts one way or the other.

— Despite the fiscal pressures, bills were introduced in January in both the U.S. Senate (S. 144) and House of Representatives (H.R. 690) to eliminate the taxability of subsidized wireless service. Regrettably, the bills have gone nowhere since they were introduced.

Given all the cross-currents, it’s certainly an uncomfortable dilemma for managers to decide whether to take immediate compliance steps. For most enterprises we recommend consulting internal counsel on what to do now. But the greatly heightened awareness of mobile telephony is bringing the issue to the forefront, and it’s important to understand that simply issuing a blanket policy banning personal use with no internal enforcement or record-keeping is unlikely to accomplish the goal. As demands on the U.S. Treasury mount, we would not be surprised to see increased enforcement activity in this area.

One final word: Some companies have taken the position that, to avoid the risk of an audit, they will eliminate all corporate-liable mobile devices and allow employees to use personal devices for business purposes, perhaps using stipends or expense reimbursement to compensate the employees for the cost of the devices and services. For both financial and data security reasons, we advise against this approach. Stay tuned for more on this issue.