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April 15, 2003

ARCHIVE: Taxing Tips


The IRS found out in the 1980's that billion of dollars in tips go unreported every year. So it's radar turned to the service industry and that led it to Nevada where a quarter of people work as bus boys, waitresses, dealers, and so on. That's 66 percent higher than the national average and a prime location to test IRS tip reporting methods. Cathy Tobin is the Tip Compliance Group Manager.


A lot of the places don't follow the law very well, it hasn't been implemented, it hasn't been stressed, but here in Nevada since the early 90's we have done it with restaurants, we have done it with casinos, we recently added the taxi cabs to our list, spas, masuse, hair dressers. And here we started with Casinos, we have moved in to restaurants, I am starting to move into bar and pub chains.

Service employees everywhere earn sometimes double their wages in tips, walking home every day with pockets full of cash - here, that's hundreds of dollars. Some justify keeping it as a 'gift'. But, according to Washington-based IRS Project Director Jack Cheskaate some know they are supposed to report all tips and blatantly break the law.


''You kind of hear the term ''Rush and Audit Roulette'' I think is the term that you just kind of take your chances.Well, the odds are starting to creep up that's not a wise way to go these days.''

Without the resources to nab every person who underreports tips, the IRS's tax compliance arsenal consists of well, fear of audits and education like this video. It's an imitation talk-show.

''This is the Jill and Jason show, the show that makes you look act and feel smarter,''

''And do it with style, I'm Jill''

''So I guess it won't surprise you that I am Jason.''

''And today's topic is,

''Reporting your tip income,''

''Right, you gotta do it,''

''What's the best way to do it and what's in it for you,''

While fun at first, this video goes on to threaten fines and sentences for not reporting tips. It features actors who don't want to report tips. A Taxi driver for instance:

Track 22


TAXI DRIVER: ''I heard from some of the guys I gotta report every tip I get. Is that really so?''

JASON: ''That is one hundred percent correct Sean''

JILL: ''All Tips are taxable under the law, they are just like wages which means you have got to report them.''

TAXI DRIVER: ''Every last thing I get? Oh Great! Well what is in it for me?''

The video says reporting tips is beneficial because taxes on them provides government services like social security, unemployment, workmen's compensation and reporting more income helps credit standings too. The video explains that over and over:

To a casino dealer: ''Is a chip a tip?''

A hairdresser: ''Do I have to report tips that are like gifts?''

And a waitress: ''Its not fair, I mean its not fair.''

By the end it's clear: Tips are wages, not gifts and the IRS wants all tipped employees to keep detailed daily tip records in a little IRS-issued book.

Track 22

7:13 - 7:25

''Ya, but I get lots of tips, are they all going to fit in that itty bitty book?''

''Ha. No problem, you got lots and lots and lots of spaces and lots and lots of pages.''

Not surprisingly, to date, most tipped employees have ignored filling out lots and lots and lots of pages, let alone report lots and lots of income. It's easier to just keep the money. Meanwhile the IRS's Cheskaate says the old methods used around the country, trying to force folks to report tips, can be disruptive to business.

2:04 - 2:36

''Actually everywhere else is kind of the old way of doing business where we would go in and observe the tipping and make observations and propose audit results and so on.''

. . . exhausting the federal agencies resources.

4:56 - 5:11

''We used to spend a tremendous amount of resources trying to do the audit work and do the follow up with collection activity and trying to go seize the cars in the parking lot.''

With billions still going unreported, the IRS re-keyed it's strategy and focused on them in Nevada with two systems that bring the employer into the fray. The TRAC system is mostly about education - the employer is required to educate employees every 4 months about how to report tips.

(restaurant noise under)

The most successful PF Changs in the nation is under that system - it's on the strip and reported 1.1 million dollars in tips last year. The IRS called up the restaurant recently and said that's not enough compared to other restaurants' tip reporting. So PF Chang's Opperating Manager, Michael Katzman held a meeting with his employees and the IRS. They looked at sales numbers that didn't jive with tip reporting. Katzman says everybody seemed to understand the IRS's message: Report more tips or face the consequences.

''Then we got a letter,''

The anonymous letter vented at Katzman instead of the IRS.

1:54 - 2:07

''Generally it said that I was a liar, uh that the IRS person that was at the meeting was a fraud somebody that I had paid off.''

Katzman held another meeting to try to clear up the misunderstanding, but no one showed up. An employee who didn't write the letter but didn't want to give her name says service workers are backed into a corner - when the employer is brought in to the equation.


''It's the same thing, it's pressure, if you are going to make a big deal on claiming and stuff like that then you can find some place else to work because the IRS comes down on the employer to come down on you even though the employer should have nothing to do with it. It is between what you claim on your personal income tax, that is why it is called personal income tax and not employer income tax, but they bring the employer into it to basically muscle you into doing what they want.''

She and the Culinary Union in Las Vegas like the old way of tip reporting . . . on the honor system. She says there is only one way to guarantee everyone gets their share of tips.

''What they have to do is tack like 15 percent on to every bill.''

The IRS has a second method it says it easier for everyone. It's called a TRDA. The employer and the IRS agree on a tip-reporting rate. Then the employer automatically withholds the appropriate amount from the employees check . . . regardless of the employees actual tips. The IRS insists the rates they pre-determine are below the actual average tip income and if necessary it'll adjust tip rates down. It encourages employees to keep track of their tips just to back up any claim that tips are lower than the pre-determined rate. Meanwhile the IRS's Cheskaaty says the government is entitled to a share of the money service employees aren't reporting - and these systems are working.

8:55 - 9:16

Well, elsewhere around the country are right now conducting fairly extensive audits. We are out there right now having folks come in right now with their records and we are doing a lot of audit work and collection activity and so on and here again we would like to get away from that we would like to come up with a uniform consistent reporting method on a nation-wide basis that serves everybody's interest.''

The IRS intends to push the TRDA method harder throughout the United States this year. Cheskaaty says when employers sign up - that helps it to focus its resources on the ones who don't sign up. FOR YEARS NOW NEVADA CASINOS HAVE ENJOYED A SIMILAR DEAL, BUT WITH A CRITICAL DIFFERENCE --- THEY GET IMMUNITY FROM IRS AUDITS REGARDING TIPS AS LONG AS THEY PAY TAXES ON THE NEGOTIATED TIP RATE. CHESKATY THINKS THIS KIND OF PROGRAM MAY BE THE ANSWER:

3:41 - 3:48

Clearly this vehicle will be available to the restaurant industry and available to other tipping environments should they choose to use it....2:44 - 2:49

... we are trying to cure this thing nation wide.''

SINCE THE GAMING INDUSTRY HERE BEGAN USING THIS SYSTEM IN THE EARLY 90S, THE AMOUNT OF MONEY REPORTED AS TIPS HAS QUADRUPLED TO 811 MILLION. Last week, casinos around the nation and the IRS AGREED TO APPLY THIS PROGRAM NATIONWIDE STARTING IN JUNE. WHEN CASINOS SIGN ON, the IRS estimates the amount of reported tip income will at least double. And rise 300 percent if applied to other tip environments like restaurants around the nation.

For KNPR, I'm Ky Plaskon

See discussion rules.


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