Monday, June 15, 2009

Pay Phones

As a recovering IRS tax auditor, I have some comprehension of the nature of the tax collection beast. Most of the people I worked with at the IRS had no greater love for taxes than does the average American. But they were interested in making sure that everyone fulfilled their legal tax obligations.

There were some IRS employees, however, that had rather insidious views about taxation. I can only assume that a recent trial balloon floated by the IRS as a way to get more money from Americans comes from those quarters. The WSJ reports that the IRS is proposing a stricter interpretation of “a 1989 law requiring workers using company phones for personal use to include the value of those calls as income.”

How much stricter? Do you have a company supplied cell phone? You can plan on reporting as income subject to federal and state tax 25% of the company’s cost of your phone usage. (For the record, I do not have a company provided cell phone.)

The reasoning behind this is that almost everyone that has a company cell phone uses it at least somewhat for non-business personal purposes. That usage, says the IRS, represents income. Since it is difficult to strictly define how much usage is personal, the IRS proposes 25% as a rule of thumb. You could use your records to prove a lower usage, but the IRS knows that few people will actually do that.

The WSJ editors raise the specter of taxing all kinds of other “fringe benefits,” such as “a per-cup tax on office coffee, or targeting furtive visits to ESPN or Hulu on the office PC.” They suggest that this kind of thing is “like charging for the use of the company washroom.”

This kind of taxation, say the WSJ editors, is “precisely the sort of common non-sense that incites tax revolts.” It would impact a lot of people but would pull in only a marginal amount of revenue. It brings to mind the 1773 Tea Act, which was meant not so much as a revenue producer as a reminder to the American colonies that the British Parliament was boss. This was such a non-starter for many Americans that a few of them in Boston responded with the renowned Boston Tea Party.

While I am generally opposed to increased taxation, I think that the WSJ editors might be pushing their argument just a little too far. All of these same arguments were bandied about years ago when IRS decided to tax personal use of company automobiles. There was some consternation, of course, but people settled into the new routine quite rapidly. There could be a difference here, however, because far more American workers have company cell phones than have company cars.

Yet another issue is the prospect of some future administration “nominee [going] down for taking too many personal calls without giving the government its due.” This is a real possibility, considering the fact that so many people that are talented and intelligent enough to rise to the top levels of government already can’t seem to manage to do their personal taxes properly. Do you really think it’s wise to make the tax code even more complex?

UPDATE 06/16/2009: The AP reports that the IRS is quickly backtracking on its cell phone tax trial balloon, claiming now that they really want the tax repealed.


Charles D said...

Maybe you can explain why the IRS has chosen to concentrate its audits on relatively minor issues like this one while ignoring the fact that many large corporations evade tax altogether. Apparently they have just figured out that concentrating on auditing the wealthy rather than those on Earned Income Credit will net more fraud and more money for the Treasury. Duh!

Scott Hinrichs said...

When I worked at the IRS, each case was considered for its potential to bring in additional tax dollars per hour spent on the case. Cases where low return was anticipated were ignored.

The IRS actually does focus on big business. And they get some pretty big returns from that.

In fact, the phone usage thing would primarily be business audits. But like anything that involves wages, much of the pain would be passed on to the employees of the businesses.

Imagine, for example, a company with 10,000 employees where 2,000 of them have company issued cell phones. It would start out with a massive adjustment to the firm's income tax deductions, followed by large adjustments to their employment tax return. But then the returns of each of those 2,000 employees would be automatically adjusted at fairly low cost to the IRS, since the IRS would simply mail each of these people a bill and not have to meet with them face-to-face.

The whole thing could produce a pretty high dollar-per-hour return; although, the total dollars brought in nationwide through such taxation would be a drop in the bucket.

The IRS commissioner likes to talk tough (in the article you linked), but IRS professionals know that the targets she is talking about have the best lawyers and accountants -- a lot better than the ones the IRS can afford. It makes for good populist propaganda to go after the millionaires, but the audits are tedious and produce little additional revenue.