Posted on 06/18/2002 6:56:37 AM PDT by Sen Jack S. Fogbound
High court affirms IRS power to estimate tips
Tuesday, June 18, 2002
WASHINGTON -- The Internal Revenue Service can use estimates to make sure it is collecting enough taxes on cash restaurant tips, the Supreme Court said Monday.
The court beefed up the IRS's power to calculate taxes that businesses owe from employees' tips, a thorny task because often the tips are cash, and workers report their own earnings. At issue is tax responsibilities of employers, who must pay 7.65 percent Social Security taxes on the tips their employees collect.
Nationwide, employees reported collecting $14.3 billion in tips in 1999, although the IRS suspects that amount could be higher and has been working with restaurants to improve reporting.
In Austin, the bookkeeper for the two local Threadgill's restaurants said she was not concerned.
"Our employees declare an adequate amount, and we report an adequate amount," said Gracie Taylor, office manager for Threadgill's Restaurants Inc. "If we start seeing other restaurants being hit by these estimates, we might grow a little concerned."
Likewise, David Tripoli, the operating partner at Truluck's Seafood Steak & Crab restaurant in Austin's Warehouse District, said the restaurant would be unaffected by the ruling, having already been instructed in proper tip-reporting procedures by an IRS representative.
But the National Restaurant Association called the ruling a heavy blow for the estimated 200,000 restaurants with tipped workers and for many other businesses whose employees receive tips. The decision means the IRS can present restaurant and many other small-business owners with an arbitrary tax bill if they think that employees underreported their tips, according to the association, which represents 858,000 restaurant and food-service outlets with 11.6 million employees.
"We are deeply disappointed by the Supreme Court's decision, which basically condones the IRS's unfair and unjust tactics to pit restaurateurs against their own employees, turning them into `tip police,' " said Peter Kilgore, the association's general counsel and senior vice president of operations. "Seven out of 10 restaurants are small businesses, many of which operate with slim margins. Quite frankly, this decision could mean the difference between a restaurant staying in business or closing its doors."
Monday's ruling is a follow-up to the Supreme Court's 1973 decision that the IRS can make an educated guess about employees' tip taxes when records are inadequate.
Fior d'Italia, which has been serving San Francisco for 116 years, had challenged an extra $23,000 bill that was calculated with estimates. Using credit card receipts, the IRS had figured that workers were tipped about 14 percent on meals. The restaurant contends the IRS formula does not take into account stingy cash tips, takeout meals or tip-sharing among hostesses and other staff.
The IRS will not care. It will estimate from receipts and present a bill.
You must be in the food service biz. The elimination of tipping will improve the overall cohesion and efficiency of the restaurant. In California the minimum wage continues to skyrocket, with no accounting for tipped employees. The employees behind the scene continually see their wages degraded.
In all fairness, the IRS should go after all tipped workers, from barbers to cabbies.
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