IRS Smacks Its Lips, Eyes Bigger Bite of Restaurant Tip Income : Taxes: Program offers employers relief from audits when employees report higher gratuities.
Never one to pass up a good tip--or even a measly one--the IRS has launched a nationwide program to increase tax revenue from the gratuities of restaurant workers.
The voluntary Tip Rate and Education Program requires owners of participating businesses--principally restaurants, bars and cocktail lounges--to fill out a batch of new paperwork. Restaurant owners also would have to encourage their employees to sign up in order to make the plan work.
That has fueled opposition from the National Restaurant Assn. and most of its state affiliates, including the California Restaurant Assn.
“Our problem with it is that the IRS seems to be putting pressure on employers to force their workers to report higher tips,” said Michael Rhodes, president of the association’s Orange County chapter and owner of Frontier Restaurants, an Orange-based chain that operates the Knowl-Wood and Russell’s Famous hamburger chains.
The Internal Revenue Service says it is offering a pretty big carrot: restaurants with at least 75% employee participation are being promised relief from the agency’s tip-income audits.
And employees who participate and report tips at or above the agreed-upon rate for their restaurant also would be exempted from tip audits, which can involve an IRS check of financial records as far back as 1988. Employees found to have underreported tip income are assessed for back taxes and, potentially, penalties; their employers are required to pay federal Social Security taxes on the unreported tip income.
The audit exemption might make some employees happy, but restaurant owners see it as a cudgel, not a carrot, Rhodes said.
“It puts the restaurateur in the middle by pressuring us to force our employees to report more tip income” in return for relief from potentially costly tip audits, he said. “The employer should not be serving as tax collection agent.”
Rhodes, whose 13 restaurants are mainly fast-food types in which tipping is rare, also complained that “carwashes, beauty shops and all the other places” where tips are a big part of employees’ income are not included in the program.
He said the National Restaurant Assn. has begun lobbying in Washington for congressional action to do away with the plan or to revise it to relieve employers of responsibility for employees’ tip reports.
In the food industry, those who deal directly with customers are now presumed by the IRS to make at least 8% of their income from tips. “If you don’t report at least 8% you know they are coming after you,” said Robby Robfogel, manager of the Crab Cooker in Newport Beach.
But because the traditional restaurant tip is 15%, the IRS sees a big gap that it wants to close.
