IRS announces plans to target service sector workers over undeclared tips

When President Joe Biden signed the Inflation Reduction Act last year, the White House said a new $80 billion fund for the IRS would “make our tax code fairer by cracking down on millionaires, billionaires and corporate dodgers.”

Now it seems that some of those resources – and some of the upcoming anti-tax evasion measures – will quite predictably be directed at individuals who earn significantly less.

This week, the Treasury Department and the IRS announced plans to overhaul existing programs that track tips earned by service sector employees. According to the IRS, the new Service Industry Tipping Compliance Agreement (SITCA) program “will take advantage of advances in point-of-sale systems, timekeeping and electronic payment methods to improve tip reporting compliance.”

Of course, workers who earn more than $20 in monthly tips must already report their tips to their employers, and those tips should be included in the tax information sent to the IRS.

But much of that money never reaches the hands of the government. As part of Monday’s announcement, the IRS highlighted a 2018 Treasury Inspector General report that estimated $1.66 billion in tips went unreported during the 2016 tax year.

The IRS proposal “harmonizes compliance with tip reporting requirements and their enforcement by eliminating employee participation,” according to a notice released this week. Translation: We’ll make sure the government gets its share of those tips by simply removing workers from the transaction whenever possible.

That’s something the IRS can do now that so many tips are processed electronically, as secondary transactions after you buy a cup of coffee or pay a bar bill with a credit card. (So ​​here’s a tip: Use cash to thank the service worker whenever possible.)

The new SITCA program is not yet in place and must still go through a complicated federal approval process. The Tax Administration will collect comments on the proposal until May 7. A bill passed by the House of Representatives to end new funding for the IRS included in last year’s Inflation Reduction Act could also have an impact, though the bill appears unlikely to pass the Democratic-controlled Senate. or get Biden’s signature.

That the IRS will use at least some of its new resources to seek tips from workers shouldn’t be too much of a surprise — despite all the promises from Biden and top IRS officials that no one making less than $400,000 would be targeted. As ReasonLiz Wolfe reported in January that low-income taxpayers have always been the most likely to be attacked by the IRS. In fact, low-income people who qualified for the Earned Income Tax Credit were five times more likely to be audited during 2022, according to a report by Syracuse University’s Transactional Records Access Clearinghouse.

It also fits well with the Biden administration’s plans for a “comprehensive financial account reporting regime” that the Treasury Department unveiled in 2021 with a promise to significantly increase the cost of tax evasion.

As far as IRS incentives go, targeting the working poor makes perfect sense. Wealthier Americans have the resources to fight the audit—but there may be $1.6 billion in unreported tips, most of which are likely collected by people who don’t have an accountant on their payroll.

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