EDITORIAL: Surprise! IRS puts tipped workers on notice

It was barely six months ago that congressional Democrats voted to boost IRS funding by $80 billion over the next decade under the guise of beefing up tax enforcement and wringing more money out of billionaires and millionaires. Wage-earners of less means were assured they had little to worry about from an army of new agents.

“These resources,” IRS Commissioner Charles Rettigare insisted in August, “are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.”

Yet it would be dangerously naive to believe that financially fortifying the tax agency wouldn’t have repercussions beyond the dastardly 1 Percent. And a new IRS proposal proves just that.

Last week, the agency began the process of establishing an updated tip reporting procedure for service industry employees. The program would replace three tip compliance agreements that have been in place with employers and workers since early 1990s. Gaming employees, who operate under a separate tip program, would not be affected.

The purpose of the reform is to capture more revenue from unreported tips. The plan,” Yahoo reported, “aims to leverage advancements in point-of-sale, time and attendance systems and electronic payment settlement methods to improve tip reporting compliance.”

In other words, the agency seeks to more aggressively tap data from electronic sources to more accurately assess tip compliance. In 2018, the Treasury Department estimated that 30 percent of service industry employers with tip reporting agreements failed to report $1.66 billion in tips during the 2016 tax year. Many existing tip agreements, the IRS subsequently concluded, provide “tip examination protection to employees without a measurable form of tip reporting compliance,” which is “not in the interest of sound tax administration.”

The new system, agency officials maintain, will be more efficient because it removes the employee from the equation and puts the onus on employers to more accurately evaluate income.

That’s all well and good. Service industry workers have an obligation to fully report income, as do all other wage-earners, including billionaires. The IRS isn’t imposing any new obligations and there’s no indication yet that service workers will face an increase in audits.

But the whole point of the new program is to make it easier for the tax agency to minimize the number of tips that go unreported and thus collect more federal revenue. As Reason magazine has pointed out, the IRS has a long history of targeting lower-income taxpayers, particularly those claiming the Earned Income Tax Credit. The new tip compliance proposal highlights the folly of arguing that the IRS won’t use its multibillion-dollar financial windfall to go after tax cheats in the middle and lower tax brackets.