IRS moves to simplify employer-provided cell phone recordkeeping rules

The IRS surprised many businesses and practitioners in June when it announced it is reviewing the long-time recordkeeping rules for employer-provided cell phones. The announcement generated so much confusion that its chief, Commissioner Douglas Shulman, clarified that the agency is not "cracking down" on employer-provided cell phones. Shulman also asked Congress to reform the recordkeeping rules for employer-provided cell phones.

Special recordkeeping rules

In 1989, the IRS imposed strict recordkeeping rules to show business use of employer-provided cell phones.

If the cell phone is used exclusively for business, all use is excludable from the employee’s income (as a working condition fringe benefit). Any amount that represents personal use is included in the employee’s wages. This includes individual personal calls, as well as a pro rata share of monthly service charges. Any amounts the employer reimburses the employee for business use of the employee’s own phone may be excludable from wages if the employee accounts for the expense under the accountable plan rules.

Widespread use

Cell phones were very expensive in 1989 and few individuals had one. Today, cell phones are much more economical and their use is widespread.  The old rules may no longer be practicable.

The IRS recognized that the cell phone recordkeeping rules are burdensome on businesses and employees. Additionally, most cell phone plans today charge by time and not by distance. Most plans also provide for unlimited free night and weekend calling.

Simplification proposals

The IRS proposed several ways to simplify recordkeeping:      

Minimal personal use method. Under this method, a specified amount of personal use of the employer-provided cell phone would be disregarded as minimal.

Safe harbor method. This method would designate a specific percentage of an employer-provided cell phone for business use. The IRS would treat the remaining percentage as personal use.

Many media outlets erroneously reported that the IRS intended to automatically treat 25 percent of the use of an employer-provided cell phone as personal use. The IRS merely suggested 25 percent as a possible amount.

Statistical sampling method. Another method would measure an employee's personal use of an employer-provided cell phone by statistical sampling techniques.

Legislation

The IRS’s announcement seemed to cause more confusion that clarity. Many print, broadcast and internet news sites reported that the IRS planned to increase audits of employers.

In response, Shulman said that the IRS is not "cracking down" on employers. Rather, the agency's proposals are designed to eliminate uncertainty for businesses and employees. "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," Shulman said.

Shulman urged Congress to ease the recordkeeping rules for employer-provided cell phones. "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." Congress could enact legislation this year.

Our office will continue to monitor developments in this area. Please contact us if you have any questions.

(Notice 2009-46)