IRS Eases Restaurant Audit Powers on Tip Reporting

In a concession to the restaurant industry, the Internal Revenue Service will no longer audit restaurateurs as long as they try to comply with tax laws on reporting of tips--even if their waiters and waitresses are cheating.

Instead, the IRS is shifting its enforcement focus to the employees who aren’t reporting their tips, which officials acknowledge will be far more difficult to track due to lack of money and manpower.

“It sounds like they are finally realizing they don’t have any recourse,” said Amanda Cholden, general manager of Tortilla Coast, a restaurant on Capitol Hill. “It’s great, but in all honesty we do put forth a good-faith effort.”

The IRS turnabout, which comes after years of court battles in which the agency fought to keep its restaurant audit powers, is the latest example of agency reforms that are geared toward helping taxpayers comply with the law rather than punishing those who don’t.

Thomas R. Burger, the IRS chief of employment taxes, said Thursday that “there is something wrong” when restaurant owners do everything they can to encourage waiters and waitresses to report tips but are still targeted by audits.

“If they’re doing everything they’re supposed to do, we won’t focus on the employer,” Burger said. “We think it’s much more beneficial to us to educate at the beginning.”

The IRS figures it is losing billions of dollars a year in payroll and income taxes because of unreported restaurant and bar tips. In 1998, just over $7 billion in tips were reported--tips over $20 a month must be disclosed--in an industry that does some $250 billion in business a year.

“It’s not nickels and dimes,” Burger said.