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IRS Scrutiny of Mobile Use Creates TEM Opportunity

Businesses of all sizes and types should have some sort of mobile device policy; if they don’t, they need one or the tax man may come a’ callin’. IRS scrutiny of corporate mobile phone usage is yet another opportunity for partners to sell telecom expense management solutions.

Mobile phones are given the “listed property” designation by the IRS, which means they can be used for both business and personal use. Analysts with Aberdeen Group explained this designation was created to ensure only the business usage of the device can be properly depreciated. The IRS designation was set forth in a time when mobile devices were expensive and uncommon; but, as Aberdeen Group explained, the plummeting cost of mobile phones and devices has “rendered the depreciation of these assets to be immaterial for most organizations.”

However, organizations still are required to maintain proper documentation for listed property, tracking its personal or business use. “There are still considerable issues from an employment tax standpoint that enterprises need to be aware of in shaping their mobility usage, compensation and account payment policies,” said the Aberdeen analysts, Ralph A. Rodriguez and Hyoun Park.

Proper expense management and separation of usage are keys to avoiding an audit in this area. “Because the IRS considers mobile devices easily used for both personal and business use, they do not allow for the usage on mobile phones as a deduction on corporate tax returns,” said Missy Sue Mastel, president of telecom expense management firm Mass-Tel Communications Inc. “In fact, they classify a corporate-provided cell phone as a taxable benefit to the employee.”

Mastel said The University of California, San Diego recently had to pony up $186,500 for back taxes and failing to keep logs of end users’ cell phone usage; The University of California, Los Angeles also agreed to pay $239,200 for the same reason.

These examples are evidence that proactive TEM solutions are worth the money they cost on the front end in preventing back-tax woes. It also presents another opportunity for partners to become trusted advisers for their customers. Most companies don’t even realize this is a real and costly risk. The Aberdeen Group report revealed only 23 percent of respondents to a 2008 TEM survey considered IRS-listed property requirements to be a medium-to-high priority for their mobile devices.

Aberdeen researchers said there are several steps to creating an efficient mobile policy and documentation process. First, there must be a clear delineation between personal and corporate use; and that delineation should be communicated clearly to the employees. Second, this policy must be supported by some form of technology or process that will clearly log and account for each call or minute used. Finally, the company should be able to show evidence that the log information is audited regularly to ensure employees aren’t using corporate assets for personal use.

Following these tips, channel partners can help their customers parse out personal use and get a better hold on their mobile policies. This inherently consultative sale would not only stave off an IRS audit, but it also might lead to other money-saving discoveries that result from in-depth analysis and management of telecom expenses. And to top it all off, proposing solutions such as these in a proactive manner can do nothing but help an agent’s street cred.

Chris Mezzatesta, senior vice president at TEM provider Tangoe Inc., agreed that herein lies an opportunity for the indirect channel. Tangoe’s Commcare solution, available through agents, resellers and VARs, allows personal wireless calls to be tracked and reported per individual so a company can make the proper business decisions on how they would like to report and account for their business versus personal consumption of wireless costs. “Some of our clients are utilizing the Tangoe solution not only to report on these personal calls, but to have the employees take responsibility and pay for them in an automated fashion … through the companies’ payroll process,” explained Mezzatesta.

Mastel’s company uses a Veramark solution for its clients. The application reviews each invoice for inconsistencies, and look-up tables of regular personal calls and aberrations are secluded into a non-deductible category. “From there, the CFOs and their team get their hands on the bucket and decide whether to bill back or eat it as a true ‘perk,’” said Mastel.

However, the truth about this IRS-compliant mobile policy worry is that it might not be an issue for long. Aberdeen Group said there is currently legislation to remove cell phones from the definition of listed property. The bills ─ Modernize Our Bookkeeping In the Law for Employee’s Cell Phone Act of 2008 and M.O.B.I.L.E. Cell Phone Act of 2008 ─ were proposed in February, but neither has seen much action.

With the country’s current economic condition and an impending presidential election, these initiatives are most likely on the back burner. Still, as Aberdeen Group noted, “the IRS is still actively auditing enterprises and courts are still making rulings in favor of the concept of cell phones as listed property that must be documented.”


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