-
Welcome to our legal community! Click here or the create new topic button to ask a question and receive answers and comments from our friendly and helpful legal community.
Articles that answer frequent legal questions are in our Law Guide. Important legal news is reported in The Law JournalYou can find a lawyer near you in the Lawyer Directory. If you know that you need to hire an attorney, you can submit a case review from a lawyer.
Is it tax evasion?
- Thread Starter Shadow86
- Start date
army judge
Super Moderator
The IRS says:
The Internal Revenue Service announced it is proposing a new voluntary tip reporting program to improve tip reporting compliance by employers of service industry workers, such as servers.
The IRS requires employees who earn at least $20 a month in tips to keep a daily record of their tips to give to their employer. All of those tips are then required to be included on tax returns.
Employers are then required to withhold taxes on income earned from tips.
The IRS said voluntary tip compliance agreements have been established by the IRS for industries where tipping is customary. The IRS has three different voluntary compliance agreements in place:
TRAC – Tip Reporting Alternative Commitment
TRDA – Tip Rate Determination Agreement
GITCA – Gaming Industry Tip Compliance Agreement
The IRS' proposal would create one voluntary compliance agreement: The Service Industry Tip Compliance Agreement.
The IRS said the program would include several features:
The monitoring of employer compliance based on actual annual tip revenue and charge tip data from an employer's point-of-sale system, and allowance for adjustments in tipping practices from year to year.
Participating employers demonstrate compliance with the program requirements by submitting an annual report after the close of the calendar year, which reduces the need for compliance reviews by the IRS.
Participating employers receive protection from liability under the rules that define tips as part of an employee's pay for calendar years in which they remain compliant with program requirements.
Participating employers have flexibility to implement employee tip reporting policies that are best suited for their employees and their business model in accordance with the section of the tax law that requires employees to report tips to their employers.
The announcement comes amid speculation that the IRS is increasing tax enforcement on working-class taxpayers. The IRS said this program is voluntary.
It also comes as the IRS is working to hire 87,000 new employees after the agency struggled to answer customer service questions during the pandemic. The IRS said even with additional staff, they will not be conducting additional audits on Americans making less than $400,000 annually.
https://www.kshb.com/news/national/irs-considering-changing-how-tipped-employees-report-tips
............
Tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers.
Tips include:
Cash tips received directly from customers.
Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card or any other electronic payment method.
The value of any noncash tips, such as tickets or other items of value.
Tip amounts received from other employees paid out through tip pools, tip splitting, or other formal/informal tip sharing arrangement.
All cash and non-cash tips an received by an employee are income and are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes and must be reported to the employer. If the total tips received by the employee during a single calendar month by a single employer are less than $20, then these tips are not required to be reported and taxes are not required to be withheld. Cash tips include tips received from customers, charged tips (for example, credit and debit card charges) distributed to the employee by the employee's employer and tips received from other employees under any tip-sharing arrangement. Tips also include tips received by both directly and indirectly tipped employees.
Employee Responsibilities
As an employee who receives tips, you must do three things:
Keep a daily tip record.
Report tips to the employer, unless the total is less than $20 per month per employer.
Report all tips on an individual income tax return.
Keep a daily tip record
Employees must keep a daily record of tips received. You can use Form 4070A, Employee's Daily Record of Tips, included in Publication 1244, Employee's Daily Record of Tips and Report of Tips to Employer. In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return.
Report tips to the employer, unless the total is less than $20 per month per employer
The Internal Revenue Code requires employees to report (all cash tips received except for the tips from any month that do not total at least $20) to their employer in a written statement. Cash tips include tips received from customers, charged tips (for example, credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement. No particular form must be used; however, the statement must include:
Employee signature,
Employee's name, address, and social security number,
Employer's name and address (establishment name if different),
Month or period the report covers, and
Total of tips received during the month or period.
The employee may use any document that has the above elements such as Form 4070, Employee's Report of Tips to Employer, (available only in Publication 1244, a form that is provided by the employer or an electronic system provided by your employer to report your tips.
Both directly and indirectly tipped employees must report tips to the employer.
Report all tips on an individual income tax return
An employee must use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income to include as additional wages on their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, and the employee share of Social Security and Medicare tax owed on those tips.
When to Report Tips to Your Employer
Employees must report tips to the employer by the 10th of the month after the month the tips are received. For example, tips received by an employee in August 2020 are required to be reported by the employee to the employer on or before September 10, 2020. If the 10th falls on a Saturday, Sunday, or legal holiday, an employee may give the report to the employer by the next day that is not a Saturday, Sunday, or legal holiday. An employer may require employees to report tips more than once a month; however, the statement cannot cover a period of more than 1 calendar month.
Do Not Include Service Charges in Your Daily Tip Record
Charges added to a customer's check, such as for large parties, by your employer and distributed to you should not be added to your daily tip record. These additional charges your employer adds to a customer's bill do not constitute tips as they are service charges. These service charges are non-tip wages and are subject to social security tax, Medicare tax, and federal income tax withholding.
An employer's or employee's characterization of a payment as a "tip" is not determinative. Distributed service charges (often referred to as "auto-gratuities" by service industries) should be characterized as non-tip wages. Revenue Ruling 2012-18 reaffirms the factors which are used to determine whether payments constitute tips or service charges. Q&A 1 of Revenue Ruling 2012-18 provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge:
The payment must be made free from compulsion;
The customer must have the unrestricted right to determine the amount;
The payment should not be the subject of negotiation or dictated by employer policy; and,
Generally, the customer has the right to determine who receives the payment.
See example below.
Example: Restaurant's menu specifies that an 18% charge will be added to all bills for parties of 6 or more customers. Dana's bill for food and beverages for her party of 8 includes an amount on the "tip line" equal to 18% of the price for food and beverages and the total includes this amount. Restaurant distributes this amount to the waitresses and bussers. Under these circumstances, Dana did not have the unrestricted right to determine the amount of the payment because it was dictated by employer policy. Dana did not make the payment free from compulsion. The 18% charge is not a tip. Instead, the amount included on the tip line is a service charge dictated by Restaurant.
Reporting Tips Allocated by Your Employer
If the total tips reported by all employees at a large food or beverage establishment (as defined below) are less than 8 percent of the gross receipts (or a lower rate approved by the IRS), then the employer must allocate the difference among the employees who receive tips. If your employer allocated tips to you, then the allocated tips are shown separately in Box 8 of your Form W-2, Wage and Tax Statement. They are not included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), or Box 7 (Social security tips) of your Form W-2.
Generally, you must report the tips allocated to you by your employer on your income tax return. Attach Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, to report tips allocated by your employer (in Box 8 of Form W-2). Other tips not reported to the employer must also be reported on Form 4137. However, you do not need to report tips allocated to you by your employer on your federal income tax return if you have adequate records to show that you received less tips in the year than the allocated amount.
Tip Recordkeeping and Reporting | Internal Revenue Service
............
Does the IRS Go After Waitresses for Their Cash Tips?
By Russell Huebsch
Updated July 27, 2017
Waiters and waitresses under report their tips by 84 percent, according to the Internal Revenue Service. The high prevalence of tax fraud in the service industry makes waitresses a big target for IRS auditing. Thus, reporting only the actual amount of tips received and adequate record-keeping can prevent penalties from the IRS.
Identification
The IRS does go after waitresses for cash tips, because the lack of tracking of tips in many businesses leads many workers in the industry to omit tips on their taxes. Just working as a waitress can increase a person's chance of audit. A special software program employed by the IRS gives taxpayers a score based on their custom formula called DIF (Discrimination Information Function). Although the DIF formula is secret, we know that it is based on statistics from other taxpayers. For example, a waitress that earns a base salary of $20,000, but reports just $100 in cash tips probably has unreported income because other workers with a similar income and job report more tips.
Considerations
An audit can reveal unreported cash tips even without direct evidence of under-reporting. For example, the IRS can compare a waitress's lifestyle to her income. A low income but high amount of spending suggests unreported income. For example, a waitress that claims a gross income of $20,000 but buys a $25,000 luxury car probably has at least $5,000 in unaccounted income.
Penalties
Unreported income due to negligence incurs a penalty of up to 20 percent, and cases of tax fraud allow the IRS to impose a penalty of up to 75 percent. The IRS does not have exact guidelines for what constitutes fraud and negligence but it usually levies a negligence penalty rather than pursue a criminal case. If you had a large amount of fraud, like $100,000 in unreported tips, the IRS may try to charge you with fraud. More than 75 percent of audited returns result in an additional tax obligation to the IRS, according to John Dobosz of "Forbes."
Tip
You do not need to report tips to your employer if you regularly receive less than $20 in tips each month, but you still have to report it as income on your return. Keep records of any tips you receive and those that you give out, such as distribution of tips as part of a tip-sharing agreement with other employees. The IRS assumes waiters and waitresses receive at least 8 percent of sales in tips, unless the worker can prove otherwise.
Tax Law on Claiming Tips
............
Tax Counsel
Well-Known Member
Technically knowingly not reporting all your income on your tax return is tax evasion. But you'd not likely get criminally prosecuted to just failing to report some tips. The more likely outcome, should the IRS discover it, is getting whacked with 20% accuracy related penalty (what used to be called the negligence penalty) or a 75% civil fraud penalty. Even the civil fraud penalty for just this one relatively small failure to report income is not likely as the tax auditor has more to prove to set that up. The accuracy related penalty, on the other hand, is simple for the auditor to assert. And that's how most of these kinds of cases end up: paying the tax you were supposed to pay, paying the 20% penalty and paying interest. You'll have to decide whether you want to take that risk. No good tax advisor will tell you not to report all your income.
You were answered in post #3.
army judge
Super Moderator
If that is TRUE, it isn't very clever to ADMIT (CONFESS) to it on a public internet forum.
The IRS, as are state, municipal, and all other tax collection agencies are always sniffing, snooping, eavesdropping, and observing.
Most things people say or type, are best left with only a mental imprint, not a public confession.
Tax Counsel
Well-Known Member
If you are failing to report a significant part of your income, that raises the possibility of a fraud penalty. But before you get caught up in trying to figure out if you want to take the risk, complete an accurate tax return with all your income. I suspect the tax on that will be less than you think. By the way, are you reporting your tips to your employer? The employer is supposed to get that information and put it on your W-2.
just to be clear, I'm not a waiter/server. I work an hourly wage job, I'm asking I someone else's behalf. This person has to input every night into a computer how much they made in tips. She only reports the tips she makes from "card payments" but she doesn't report, even to her employer, the cash tips and hasn't for two years.
Is this the same woman from your other thread?
No, my other thread is about my wife and she's a restaurant manager and has been for… a while. Not that it's anyones concern but I'm asking on behalf of my best friends girlfriend. Someone told her she could face years in prison and me and my friend don't know shit about the law so we're both seeking advice.
adjusterjack
Super Moderator
Unlikely, for something that is probably chump change to the IRS.
Wesley Snipes got 3 years in prison (plus fines and restitution) for failing to pay taxes on millions of dollars.
David Felt got 18 months (plus fines and restitution) for failing to pay taxes on income of $4,000,000.
Mike "The Situation" Sorrentino got 8 months. His brother, Marc, got 2 years. They failed to pay taxes on income of $8,900,000.
Scott Chappelle got 38 months for evading taxes for 10 years. Over a million dollars in restitution.
Gary D Primm Jr got 36 months for failing to pay taxes on over a million dolars in income.
Whatever your friend's girlfriend is doing is likely to just cost her a great deal of money when and if the IRS gets her.
Tax Counsel
Well-Known Member
Under reporting for multiple years increases the chances of a fraud penalty or criminal prosecution. If prosecuted for tax evasion and found guilty, the maximum sentence is six years in federal prison, though few first time offenders see the max penalty.
Share this page
