The Internal Revenue Service says restaurants and their employees are significantly under-reporting that little extra bit we tack on to our bills — the tips.
The IRS figures the food and beverage business should be sending in some 200,000 tip disclosure forms every year. But only about a quarter ever show up. The IRS wouldn’t go on the record, but said it recently hired an outside contractor to identify slackers and that it’s conducting more audits.
Here’s the way it’s supposed to work: Servers and valets are supposed to report their tips to the boss. The boss reports that cash as employee income. Both the establishment and employees pay taxes on it. But Patrick, a former parking valet in Nashville, who didn’t want his last name used, says it didn’t worked that way in his experience.
“It was more of a “don’t ask, don’t tell” policy with ignorance being bliss on both sides,” said Patrick.
He says restaurants aren’t anxious to pay extra taxes, and neither are workers. The National Restaurant Association wouldn’t grant us an interview about IRS compliance, but says it is working to improve tip reporting. A narrow sample of food service workers finds most decide not to report about half their cash gratuities. We granted them anonymity so they would speak freely.
Erik, a former bartender and waiter here in Washington, says he started out reporting all his tips.
“Originally, I was declaring 100 percent until an older server told me I was essentially being a moron,” said Erik. “She told me, you never declare all your tips, especially not all of your cash tips.”
Tips on credit cards have a paper trail so they have to be reported, but not cash tips. Restaurants say they do advise employees to report all tips — and Jessica, a former waitress from Upper St. Clair, Penn., says hers did.
“In the break room of the restaurant where I worked, they had an entire wall of posters and a lot of them had to do with reporting your tips and what happens when you don’t report your tips correctly,” she said. “There were newspaper clippings of people who got investigated by the IRS.”
Still, cash transactions have long been an opportunity for tax evasion. Sheldon Cohen started the national tip compliance program when he was IRS commissioner 50 years ago.
“Waiters are not less honest than other people,” said Cohen. “They have more opportunity than other people. We discovered it basically doesn’t go necessarily with the occupation, it goes with the opportunity.”
For example, Cohen says, back when he was commissioner, doctors were frequent tax scofflaws.
“Forty-five or 50 years ago doctors received most of their payments in small amounts,” he said. “Doctors’ visit was $5 or $10 and people left cash most of the time.”
It wasn’t long before insurance companies and credit cards put an end to cash changing hands, so doctors had a harder time hiding income. But restaurant servers and bartenders still get an average 40 percent of their tips in cash.
Chris Bergin, publisher of Tax Analysts, says the IRS is under the gun to capture more of that lost revenue.
“We’re running huge deficits. We’ve got an enormous debt,” said Bergin. “The IRS is under political pressure to close what’s called the “tax gap” and go after people who are not paying their taxes.”
But as long as tips are cash, and essentially a private transaction, there may be only so much the IRS can do.