John McCrory

The IRS did an about-face this week on the cell phone tax. The agency released proposed accounting methods for dealing with the 1989 law’s requirements a week ago for public comment. But, IRS Commissioner Doug Shulman now says the law taxing business-provided cellphones is outdated and directly calls on Congress to repeal the law.

In a short statement, Shulman said:

This month, the Internal Revenue Service asked for comments on ways to simplify compliance with rules related to employer-provided cellular telephones. The current law, which has been on the books for many years, is burdensome, poorly understood by taxpayers, and difficult for the IRS to administer consistently. Some have incorrectly implied that the IRS is “cracking down” on employee use of employer-provided cell phones. To the contrary, the IRS is attempting to simplify the rules and eliminate uncertainty for businesses and individuals.

Although some of the proposed changes would add clarity, the current law will inevitably leave widespread confusion among employees and businesses. Therefore, Secretary Geithner and I ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers. The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete.

While not actually abandoning the proposed accounting changes, the move by the IRS and Treasury are a clear signal that they are stepping out of the way so Congress can act on bills currently in committee. Legislation introduced in January is now on track to be passed this year.

The “cell phone tax” refers to an IRS requirement that organizations who provide mobile phones to their employees must report any personal use of those phones as income. There is not a similar requirement for personal use of a desk phone, of course, and the rule dates to a 1989 law that sought to rein in perks given to executives instead of increasing their taxable compensation.

Twenty years later, mobile phones are ubiquitous staples of work, not a luxury perk for elite executives. Employers and employees dislike the “cell phone tax” largely because it is a bookkeeping hassle to track all calls made by employees on company-provided mobile phones and identify which calls were personal, determine the dollar-value of those calls, and report it on an employee’s W-2. With the arrival of smart phones, that valuation is even more complicated.

Employers had reason to fear the IRS would come after them, even though the law was rarely and haphazardly enforced. Last year the IRS hit UCLA with a bill of nearly $240,000 in back taxes when the school failed to keep track of how its employees were using their university-issued cell phones. It also made the University of California San Diego pony up more than $180,000.

Legislation to repeal the cell phone tax was introduced in both the House (H.R. 690) and Senate (S. 144) earlier this year. Keep track of the status of these bills below.