Ruling won’t affect IRS toke tax system

Gary Thompson

Thursday, Oct. 31, 1996 | 11:59 a.m.

The Internal Revenue Service said a court ruling barring the use of credit-card receipts to calculate tips won't have any impact on Las Vegas restaurant workers.

Tax attorney Michael Singer agreed, saying the ruling only prohibits the IRS from forcing restaurants to pay back taxes owed by workers who underreported income.

When a federal court in Washington, D.C., issued the ruling last week, Las Vegas casino operators and restaurant owners besieged the IRS with queries about the potential impact on their businesses.

Tens of thousands of casino and restaurant workers rely on tips for the bulk of their income. The IRS has long maintained many don't report the full amount of income.

As a result, the agency has developed programs to audit tip earners from particular businesses as a group.

Cocktail waitresses working at a typical Strip casino, for example, are considered likely to receive an average tip of 50 cents per drink if they serve table-game customers, while those serving slot-machine players might get 35 cents a drink, depending on the property and shift.

If a waitress signs an agreement with the IRS, the tax agency will compute her tax obligation based on the average "toke" and number of drinks served per shift. The IRS won't audit the waitress as long as she pays the agreed-upon taxes.

A similar method is used for food servers. The agency uses credit-card receipts from a particular restaurant to determine the average tip per customer, then signs agreements with the workers.

The court ruling last week held that restaurant owners can't be forced to pay back taxes based on the IRS auditing procedure.

"This case won't have an impact in Las Vegas because it really dealt with the employers' obligation, not the employees," said Singer. "They were trying to force the employers to withhold the taxes based on the credit-card auditing technique."

IRS spokeswoman Marilyn Steen said that when contracts are made with Las Vegas casinos and restaurants, "they agree to collect tips at the time they are earned. If tips aren't being reported properly, they might change the contract."

If the ruling stands, the IRS might be forced to audit tip earners individually, rather than as a group from a specific business. The IRS is expected to appeal the ruling, as it has a similar one issued by a federal court in Alabama.