In September 14, 2011, the Internal Revenue Service issued long awaited guidance on the tax treatment of employer-provided cell phones, and other telecommunication devices. In Notice 2011-72, the IRS announced that if an employer provides a cell phone to an employee for non-compensatory business reasons, the substantiation rules necessary to exclude the value of the use of the cell phone as a non-taxable fringe benefit are deemed satisfied, so that even any personal use of the cell phone will be non-taxable. Examples of why an employer would provide a cell phone for a non-compensatory business reason include: 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. On the other hand, if a cell phone is provided to promote the morale or good will of an employee, to attract a prospective employee, or as a means of furnishing additional compensation, these would NOT qualify as a non-compensatory business reason.
IRS Notice 2011-72 likely will put an end to an issue that has been a thorn in the side of employers for many years. Prior to 2008, cell phones were considered “listed property,” which imposed heightened substantiation requirements in order for the cell phone costs to be non-taxable to employees. The IRS actively audited employers for failure to comply with these heightened substantiation requirements. Two of the more notable audits were of UCLA and the University of California, San Diego, which were reported to result in tax assessments of $239,196 and $186,471, respectively. Recognizing that business-related cell phone use by employees was extremely prevalent, and the heightened substantiation requirements were very difficult to comply with for cell phone use, and the potential tax abuse was minimal, employer-provided cell phones were removed from the definition of “listed property” for taxable years beginning after December 31, 2009 by the Small Business Jobs Act of 2010. However, in order for the cost of employer-provided cell phones to be non-taxable to employees, employers and employees still needed to comply with the substantiation requirements under Code Section 162. Although the Code Section 162 substantiation requirements were less burdensome than the “listed property” substantiation requirements, it was still a burden for employees and employers to comply with.
Notice 2011-72 puts an end to any substantiation requirement for the cost of an employer-provided cell phone to be considered non-taxable to employees, provided the cell phone is provided for non-compensatory business reasons, for taxable years occurring after December 31, 2009. Employer reimbursement of employee-owned cell phones, cell phones provided for compensatory reasons, and employer-provided cell phone use prior to 2010 is not affected by this Notice.
Employers should review their current cell phone or telecommunication device policy to take advantage of Notice 2011-72.