Anyone with a bulky, $1,200 cell phone in the 1980s was probably a hotshot executive with corporate profits to burn.

But now technicians, sales people, firefighters and a vast number of other mobile workers view the cell phone as a critical tool, not a company perk.

The IRS sees it differently.

A tax on personal use of company-owned cell phones created in 1989 was meant to affect privileged workers who had what was then an uncommon luxury.

Two decades later, it’s creating a burden for companies that outfit much of their workforce with relatively inexpensive BlackBerrys, iPhones and Razrs. As of January, there were 5.5 million Americans with mobile phones furnished by their employers, according to M:Metrics, a Seattle research firm that tracks the mobile market.

“Things have changed a lot over the years,” said Mary Jane Klimkewicz, a senior manger at the accounting firm Ernst & Young’s office in Akron, Ohio. “Really, back in 1989, cell phones were not as widespread, and certainly were not as economical.”

That was when cell phones joined company cars and home computers in the IRS category of “listed property”: property that is bought for use in a business, but that the federal government says could easily lend itself to employees’ personal use.

After the change in the law, personal calls made on work cell phones were taxable. Every time an executive used his 2-pound brick of a mobile phone to call his wife or conduct other personal business, he’d be required to tell his employer, who would calculate the value of the benefit and report it as taxable income on his IRS Form W-2.

It doesn’t seem like much to ask. But multiply that amount of record-keeping by the thousands of mobile employees at many large companies today.

To be compliant with the tax law, employers may choose either to keep track of every personal call employees make or to strictly enforce a policy against personal use of work-issued cell phones through internal audits. There’s also a third option: risk having to shell out back taxes in the event of an IRS audit.

At Steris Corp. in Mentor, Ohio, employees are told that company cell phones are for business use only, said Steve Norton, spokesman for the maker of infection-prevention and decontamination products.

“We don’t conduct any further auditing of thousands and thousands of pages of cell phone records to determine if they have been utilized for personal use,” he said.

During an IRS audit last year, the company was asked to explain its cell phone policy, without further inquiry, Norton said.

But some, like the city of Columbus, Ohio, haven’t been so lucky.

Bob McDaniel, deputy auditor for the city, said it is fairly common for the IRS to question employers about their policies to make sure they’re complying. But in 2004, the city was the subject of a less-common full audit.

“They looked at everything,” McDaniel said.

After three IRS agents spent more than two years analyzing the city’s books, they sought $3.3 million to make up for taxes the city failed to collect on government cars that employees could drive home, clothes that could be worn off the job, and possible personal calls made on city cell phones.

The city agreed to a $401,000 settlement last year.

Before the audit, the city generally discouraged personal use of company property and kept track of personal calls in most departments. It was the police and fire divisions that were out of compliance.

Because those departments didn’t keep records on what was personal and what was business, the IRS considered the entire bill a taxable benefit, McDaniel said.

Now, the city is making sure to be thorough in its record-keeping for the 1,553 city employees who have cell phones, he said. That’s not cheap.

“It costs three times as much as we collect (in tax), without question,” McDaniel said.

Many smaller employers require workers to have their own cell phones, said Kathy Tatman, a partner in D’Amore Tatman Group, an accounting firm in Cleveland. According to M:Metrics, 4.9 million people receive reimbursements from their employers for making business calls on a personal plan.

It can be an attractive alternative to having corporate a cell phone plan since less record-keeping is involved, she said.

For companies where a corporate plan makes more sense, help could be on the way. Earlier this year, legislation was introduced in Congress that would eliminate the accounting burden on employers.

“We need to modernize the law now to reflect the reality that the use of cell phones by businesses has changed dramatically in the last 10 years,” said Sen. John Kerry, D-Mass., a sponsor of the bill.

CM END SAMAVATI

(Shaheen Samavati is a reporter for The Plain Dealer of Cleveland. She can be contacted at ssamavat(at)plaind.com.)

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