Columnist Jeff German: Will IRS be Grinch or Santa?

Wednesday, Nov. 20, 2002 | 10:59 a.m.

Someone phone the North Pole. The Internal Revenue Service is in the holiday spirit.

In an abrupt turnaround by the IRS, the casino industry has bought itself more time in its negotiations with the tax collector over the amount of tips its employees should be declaring.

Industry observers are calling it an early Christmas present from the IRS for thousands of tip-earners along the Strip and downtown.

The IRS, you may recall from reading this space last Wednesday, has been pushing for higher tip reporting rates -- in some cases double and triple the current rates -- which has industry and union leaders and, of course, the workers, in a tizzy.

The talks hit a snag a week ago after casino executives complained the IRS was trying to bully them into accepting the higher rates.

But during a high-powered telephone conference on Friday the casinos promised to return to the bargaining table, and the IRS rewarded them with a six-month extension of their expiring decade-old tip agreements while the talks continue.

And no one had to call in a federal mediator or a U.N. peace-keeping mission.

"I think everyone is attempting to be reasonable, and hopefully we'll find a solution within the next six months, says Frank Fahrenkopf, president of the Washington-based American Gaming Association.

Indeed. As long as both sides remain calm and keep talking, there's a good chance the IRS will set up an equitable reporting system under the new agreements. That's what everyone wants, even the IRS.

"We're not looking for an exact amount to be perfect," says Cathy Tobin, the tip compliance group manager for the IRS in Nevada. "We're just looking for an average amount that will make the whole process easier for the employees, the casinos and ourselves."

The tip compliance program is voluntary, but those who don't sign up face dreaded audits.

Last year, according to the IRS, more than $812 million in tips from 80 percent of the casino work force in Nevada were reported through the program. Participants are required to declare an IRS-computed rate of tips per hour on their tax returns.

But not everyone is happy with the arrangement.

Culinary Union Secretary-Treasurer D. Taylor says the new proposed rates have potential to become a financial burden to many of the workers he represents.

"Government bureaucrats and accountants who have never served a meal, poured a drink, bussed a table or carried a bag are in no position to determine tip rates," he says.

That may be true. But the IRS also has a decade of experience estimating the amount of tips casino workers earn. No one really believes tip-earners have been totally candid on their tax returns.

And the IRS, which won't publicly disclose its new rates, says it isn't pulling the figures out of a hat. It calculates the rates with information, including gross receipts, provided by the casinos.

In the case of cocktail waitresses, for example, the IRS determines the number of drinks they serve an hour and what they average in tips per drink. Then it multiplies those numbers together to get an hourly tip rate. The formulas vary from station to station, shift to shift and casino to casino, depending on the amount of business being conducted.

The goal of the IRS is simple -- to get tip-earners to pay their fair share of taxes.

As for the industry, it knows it will have to accept higher rates. But it wants the IRS to lower its expectations and be more sensitive to the financial impact the higher rates will have on workers.

It wants the new rates phased in to avoid a sudden drop in income for the employees. And it wants flexibility built into the new agreements so that workers won't be required to report the same amount of tips during downturns in the local economy.

The industry also wants a "safe harbor" clause, barring audits of workers in the program, written into the new compliance agreements.

Now's the time for the industry to press its case, which seems to be a reasonable one. The negotiations are back on track, and the IRS is in the holiday spirit.