The Internal Revenue Service (IRS) has recently clarified (via IRS Notice 2011-72) the tax treatment of employer-provided cell phones or other similar telecommunications equipment that was originally enacted (changed) last fall in the Small Business Jobs Act of 2010. Before the Small Business Jobs Act of 2010 employer-provided cell phones were considered listed property that required additional recordkeeping by taxpayers regarding the business use of each cell phone and many people felt it was an administrative burden. Now the employer-provided cell phones are considered an excludible working condition fringe benefit (IRS Code Section 132) subject to some qualifications. IRS Notice 2011-72 provides that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of the business use of the cell phone in order to receive this tax-free treatment. Likewise, employer reimbursements to employees who use their personal cell phones for business will not be taxable.
However, a cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes. Cell phones in those instances will not qualify as an excludable working condition fringe benefit.
An employer will be considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business for providing the employee with a cell phone. For example, the employer’s need to contact the employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day are possible substantial noncompensatory business reasons.
Generally, the IRS has three years to assess additional tax if it determines that a taxpayer’s return has understated the amount of tax owed. For most business that were audited by the IRS in recent years, the IRS would propose a reduction in the business cell phone expense due to the alleged non deductible personal use of those cell phones. That expense adjustment could be 25% to 50% or more of the total actual cell phone expenses. The result would be additional tax due to the United States Treasury (via the IRS) from the business, plus a penalty and interest on the additional taxes. The only way to protest that IRS tax adjustment would be to provide the IRS with detail substantiation of the business use of each cell phone.
With this clarification in IRS Notice 2011-72 there is welcome relief for small business regarding cell phone expenses. The IRS did a very good job of addressing the tools of everyday work life. One issue not addressed by the IRS in this notice is the treatment of cell phones by self-employed individuals. Those individuals may consider allocating their cell phone cost between business and personal use so they would better positioned for a challenge during an IRS audit.
Tax Scams Update
The Internal Revenue Service (IRS) recently reported an increase in tax scams, especially schemes involving return filing. The IRS cautioned that unscrupulous promoters are targeting the lower-income individuals and senior citizens. The IRS discovered that some con artists are persuading individuals to file returns even though they have no filing requirement. Unsuspecting individuals are led to believe they should file a return with the IRS for tax credits, refunds or rebates for which they are not really entitled. Victims typically discover their claims are rejected or the refund barely exceeds what they paid the promoter. Meanwhile, their money and the promoters are long gone. With the 2012 income tax filing season (for 2011 returns) only a few months away, now may be a good time to remind your friends and relatives of the issues below.
The IRS cautioned taxpayers to be alert for:
- A. Fictitious claims for refunds or rebates based on excess or withheld social security benefits
- B. Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS
- C. Unfamiliar for-profit tax services teaming up with local churches
- D. Home-made flyers and brochures implying credits or refunds are available without proof of eligibility
- E. Offers of free money with no documentation required
- F. Promises of refunds for “Low Income-No Documents Tax Returns”
- G. Claims for expired Economic Recovery Credit Program or Recovery Rebate Credit
- H. Advice on using the earned income tax credit (EITC) based on exaggerated reports of self-employment income
The IRS also reminded taxpayers to look carefully at the fees charged for tax return preparation. Some promoters may charge unreasonable amounts for preparing legitimate returns that could have been prepared for free by the IRS or IRS-sponsored Volunteer Income Tax Assistance partners.
Please consult with your tax advisor before acting on these topics. Your tax advisor can ensure you receive the maximum tax benefits considering your company structure, income tax rates, etc. You can also visit the Internal Revenue Service web site http://www.irs.gov/ for more information on these issues.
Thomas L. Broderick, C. P. A. is the Treasurer of Pickens-Kane Moving & Storage Co. in Chicago, Illinois. He has served as Chairman of the Board of Trustees of the Illinois Movers’ and Warehousemen’s Risk Management Trust since 1996. He has also served as president of the West Central Association Chamber of Commerce in Chicago for the years 2007 thru 2009. Many individuals, small businesses and non-profit organizations consult him for various accounting, investment, insurance and tax issues.
Revised: October 20, 2011