Tuesday, August 22, 2006

A nasty dust-up over taxes owed on tip income has Las Vegas bar and
restaurant workers seething and the Internal Revenue Service beating a hasty
retreat -- for now. The ruckus, which reached a head at a so-called "tip
summit" between IRS and hotel-casino industry representatives on Thursday,
stemmed from two recent developments that insiders said may or may not be
related. The first involves negotiations between the IRS and Culinary Local
226 to revise and extend three-year tip agreements that are set to expire
this month. Those negotiations appeared to have been at a loggerhead. At the
same time, the IRS has been sending notices to thousands of local workers
saying they are being audited or that they owe additional taxes because they
underreported their tip income. The notices subjected the affected workers
to back tax liabilities and penalties, possible prosecution for tax evasion
and possible liens on their homes, Culinary union spokesman Kevin Klein said
Friday. The notices also abrogated a longtime pact between local casino
workers and the IRS in which the federal agency promised not to audit
workers who agreed to have their taxes withheld by their employers based on
an agreed-upon formula to calculate their tip income, he said. Under the
15-year-old program, each worker's reported tip income is determined by
their position, the property they work at and their work shift. The intent
of the program is to make it easier for the IRS to ensure compliance and
relieve individual workers from having to keep an exact records of all their
tips. Participants said Thursday's meeting started off acrimoniously, with
gaming companies complaining about the audit notices and the problems their
workers are encountering. "People are very upset," Klein said. "(The IRS)
blew it on this. They negotiated rates three years ago and should have just
stuck with it."
The IRS is saying in its notices to workers that they underreported their
tip income by $2,000 to $6,000 a year, he said.

Marvin Naus, a food server at Sir Gallahad's Pub and Prime Rib House in
Excalibur for 13 years, has been snared in the dispute for almost a year.

He got a notice in September that he failed to report $5,000 in tip income
and owed an additional $1,700 in taxes.

That's because he worked in three different restaurants at different times,
and MGM Mirage reported his tip income under the three formulas appropriate
to each restaurant.

Even when Excalibur documented his employment and confirmed his estimated
tip income was correct, the IRS refused to relent.

Naus, who called the situation intimidating, said after an exchange of nine
letters, the IRS has reduced its claims against him to $542.

"It's too bad. We had a win-win situation the way it was set up. We liked
the tip rates and the absence of audits. Now they just changed the rules,"
he said.

Some employees hit by surprise with the letters from the IRS have just gone
ahead and paid the disputed amounts, sources said.

Others, like Naus, have contested them with little success, which may also
be contributing to the tensions over the issue.

For now, a gaming company executive said, "The main message from the hotel
industry is if a worker gets a notice, he or she should not pay it, but go
to their supervisor to see what can be done."

If the IRS continues sending out notices, there is a real risk the program
will implode because workers who see it as unfair will opt out, Klein said.

Naus, for one, said he and a lot of his co-workers will walk away from the
program if the IRS breaks its agreement.

That wouldn't benefit the IRS, which has managed to privatize its tax
collection with the agreements; or the 50,000 workers, 35,000 of whom are
Culinary union members, who are free from the fear of audits; or gaming
companies whose tax withholding is vastly simplified by the program.

"The ultimate goal is to be fair," said American Gaming Association Vice
President Wally Chalmers, who was at Thursday's summit.

"It's worked for over 10 years. But if new rates aren't fair, workers will
take a second look, and the program will fall apart," he said.

Thursday's meeting ended on a better note than it started, although industry
insiders said they doubted the issue will be resolved before December.

Industry officials said the participants seemed to reach some agreement on
four points raised by Culinary union representatives.

The union is seeking better communications with the IRS, a grace period for
workers being notified by the agency while a new agreement is being
negotiated, and new tip calculations based on a worker's shift and where
they work. It also wants the IRS to act fairly toward workers who sign up
for the voluntary program.

Also, gaming company executives agreed with IRS officials that it was
reasonable to look at adjusting the amount of tip income that is being
withheld from workers' pay because it has not been reviewed in years,
especially considering the proliferation of high-end amenities on the Strip.

A gaming executive, who asked not to be named while the program is being
negotiated, said the companies also want the IRS to implement any new
formulas all at once.

Otherwise, the companies fear workers will be jumping from one casino to
another to take advantage of different tip income projections.

Another executive conceded that there is some tax cheating by workers signed
up in the program.

Specifically, some employees jump in and out of the program as their tip
income goes over and under the applicable formula.

At the summit, the IRS agreed to extend the deadline for back taxes owed and
audits until the end of the year, taking the immediate pressure off workers,
according to a Washington source who asked not to be named because he was
not at the meeting.

The agency also agreed to set up an internal task force to review tip rates
and compare them to actual tip income that is reported in other cities, he
said.

Meanwhile, Culinary union officials got busy Friday organizing committees at
every major casino and scheduling a follow-up meeting with gaming executives
to plot strategy to resolve the issue, Klein said.

IRS spokesman Raphael Tulino on Friday declined to confirm or deny the
outcome of the meeting because he is prohibited from discussing specific
cases.

Other sources in Washington said the IRS is interested in not seeing the
issues "over-hyped" because of the delicate negotiations now under way.

"This was the first meeting in a process of meetings," another Washington
source said. "Lower level IRS bureaucrats were the source of the problem.
Now, higher-ups have to see what can be done to break the logger-head."

Nothing more concrete is likely to happen until after Congress returns from
its recess on Sept. 5, Chalmers said.

"But I'm optimistic. I think some real progress was made yesterday," he
said.