IRS may tax work cell phones as a 'fringe benefit'

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The Internal Revenue Service is weighing proposals to tax a portion of work-related cell phone bills as a "fringe benefit" and is looking at ways to simplify the law--actions the wireless industry is hoping to squash.

The IRS is proposing that employers declare 25 percent of an employee's annual cell phone expenses as a taxable benefit. However, the tax collector said employees could avoid being taxed under the proposal if they were able to prove they used personal cellphones for non-work-related calls during work hours.

The IRS also might decide on a set number of phone minutes as "minimal personal use," which would be untaxed. Additionally, the agency said that employers could try and and using statistical sampling to find out what part of their workers' mobile use is personal and how much is work-related. Workers would then be taxed on the difference. Got all of that?

All of this stems from a 1989 law, which mandated that workers who use company-provided cell phones for personal calls count the value of those calls--i.e. that portion of the bill--as income, and then pay taxes on that income. However, employers and their employees have long ignored the rule.

Wireless carriers, including Sprint Nextel and Verizon Wireless, are understandably nervous about the proposal, which might result in enterprise clients cancelling wireless contracts for fears of tax problems, and instead reimbursing employees for a portion of their wireless bills. The carriers argue the rule is outdated anyway, since rates have declined and and night and weekend minutes are free on most plans.

"This is a regulation from a bygone time, dating back to the infancy of the cellphone business, and it is in desperate need of updating," Howard Woolley, a senior vice president with Verizon, told the Wall Street Journal. A Sprint spokesman made similar comments to the Washington Post.

For more:
- see this WSJ article (sub. req.)
- see this Washington Post article

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