Advisory Committee on Tax Exempt and Government Entities (ACT ...

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Tax Treatment Of Cellular Telephones And Internet-Provider Allowancessubstantiation requirements of IRC section 274. Consequently, the issue of cellularphones is being raised routinely in executive compensation examinations, both of thecorporate side with respect to the company’s deduction treatment and on the payroll taxside.Anecdotally, we have received information from a number of governmental employeeswho have reported on two major components of this project, mainly: a) recordkeepingand transaction reporting requirements; and b) audit results.A synopsis of the “typical” responses which were received is as follows:Recordkeeping and Transactions Reporting• I am the County auditor of xx, and as such am required to review the cellphone bills of employees that are provided cell phones by the County.This review is very tedious and time consuming and basically unfairbecause I am not required to monitor employee land line use for the sameactivity. Employees who are not tied to a desk are penalized and taxedmore than their desk bound counterparts.• I am very happy to see someone working on eliminating this timeconsuming, archaic requirement.• Some of us have cell phones policies that allow for limited personal usesimilarto the limited personal use we have for our desk phones- and justhope this passes a federal auditors’ review.Then the board thanked me for the information and changed our policy tosay- “limited personal use”- knowing that I had warned them that wemight have a problem with the IRS.PDA’s have just compounded the problem. We don’t get any informationabout where and e-mail went or who it came form- it just lists the amountof time on the system.• The Business Manager is responsible for internal review of cell phoneinvoices.• For the district, the financial impact is virtually a wash. I think the amountof time and trouble that we spent on it, though, probably greatly exceedsmy amount that would have ever been realized by the IRS.• To fix this problem, and keep us out of hot water with the IRS, we cameup with an expensive solution. I include the entire cost of theirblackberries as W-2 wages.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 Page 6
Tax Treatment Of Cellular Telephones And Internet-Provider AllowancesAUDIT RESULT• What a nightmare! We do not have staff to sift through cell phone billsand try to determine what is business and what is personal.• The law needs an overhaul that reflects the new technology andpurposes of conducting business via office phones, PCs, cell andBlackberry as an extension of their desk phone and computer.• In each audit, the use of employer provided cell phones and laptopswere an issue. A letter has been issued by the IRS closing the audits of5 of the colleges. In each case discrepancies were noted with respect tocompliance with IRS regulations related to listed property and in one aliability of $2,519 was assessed.Other financial implications:Some states, for example, the State of Illinois, are required by State law to use grosscompensation as the basis for contributions to state retirement funds. Thus, the valueof the cell phone added to an employee’s wages is used to calculate wages subject toretirement contributions and future benefits. This situation presents disparate treatmentfor an employee not issued a cell phone by the same employer. It also increases theamount of contributions paid by the employing state agency and presents an unfairburden on state budgets.By contrast, the State of Ohio Public Employees Retirement System only views truecompensation for services as includible in retirement and distribution calculations – i.e.,there are items of ‘non includible income’ for purposes of the state retirement system.Thus, we have disparate treatment of employees in the same organization anddisparate treatment of employees by state of employment.This issue of taxation of personal vs. business cell phone usage is a broad, and rangesfrom the smallest employer to the large multi-national corporations. The issue spans allindividual taxpayers, all organizations regardless of type of organizational entity andimpacts all public and private sector employers.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 Page 7
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