Even though the weather is cooling, there is a heated atmosphere in Nevada over employee tips in the gaming industry. With current gaming industry tip compliance agreements in Nevada up for renewal by the end of this year, the American Gaming Association (AGA) is actively working with its casino members and their employees to press the Internal Revenue Service (IRS) to adopt fair and reasonable tip reporting guidelines for the future in the new round of agreements, as well as to resolve a snafu of erroneous IRS tax notices sent to employees who were supposed to be protected from audit under the current agreements.
The gaming industry has been at the forefront of the tip agreement approach, entering into the first tip agreements almost 15 years ago in Nevada and now participating in a national program that extends to major gaming markets across the country. The success of the gaming tip program has led the IRS to recently offer a similar approach to the general food and beverage industry.
The concept behind gaming tip agreements is simple: if an employer agrees to take on the administrative burden of implementing and operating the tip reporting system, and the employee agrees to report tips at or above a rate that is determined by his or her job category, the IRS agrees not to audit the employee or the employer with respect to those tips. The program is entirely voluntary, and the employer and the employee both must choose to participate.
The tip reporting agreements are meant to benefit both the IRS and gaming employees. The agreements benefit the IRS in the form of revenue collection, and they dramatically reduce IRS enforcement and collection costs. The agreements have the potential to benefit the gaming industry and its employees by reducing their recordkeeping burden, giving them protection against IRS examination or audit, and producing a verifiable income that is helpful to the employee in securing auto loans, home mortgages, and Social Security and retirement benefits. However, whether those potential benefits to the industry and its employees actually are realized depends upon the negotiation with the IRS of an administratively workable tip agreement that uses reasonable tip rates. Without reasonable tip rates in place, neither employers nor employees will likely sign on to the program.
Over the years, the AGA has played a leading role in gaming industry efforts to press the IRS for fair and reasonable tip reporting guidelines under this program. The AGA spearheaded the hard-fought industrywide negotiations with the IRS over the current tip agreements that are now expiring, with the industry beating back initial IRS efforts to double, triple or even quadruple the tip rates for employees.
The AGA once again will be working closely with its casino members and their employees to seek fair and reasonable tip reporting guidelines as those companies enter new negotiations with the IRS over the next round of tip agreements for properties in Nevada.
Before the negotiations can begin, however, the IRS must resolve a bureaucratic snafu that threatens the existence of the entire program. Throughout this past summer, the IRS sent thousands of erroneous IRS audit notices to Nevada casino employees participating in the current tip reporting program. Gaming industry employers quickly discovered that these IRS notices were erroneous and, working in conjunction with AGA, immediately alerted the IRS about the problem. The IRS acknowledged the error.
The industry sought a quick, across-the-board solution by asking the IRS to rescind the erroneous notices for all gaming employees in Nevada who were participating in the tip program for the period covered by the notice. However, because the IRS was slow to respond in stemming the flow of erroneous tax notices and in implementing any type of across-the-board fix, gaming employers have had to devote considerable resources to help each of their affected employees resolve the errors. The AGA and its Tax and Finance Task Force have had a series of discussions with senior IRS officials seeking a swift and full resolution of these erroneous IRS notices. While the industry’s efforts have resolved most of the problems, employers still are working to assist individual employees in resolving outstanding cases.
The AGA is working with senior officials at the IRS to ensure that such errors do not occur again. And as the gaming industry in Nevada looks ahead to renewal of the tip program in Nevada, it is critical that all parties to the negotiations bear in mind several fundamental principles. These agreements are entirely voluntary, and the gaming industry and its workforce have stepped forward to participate and work with the IRS in this program, while much of the rest of the hospitality industry remains on the “honor system” of employee tip reporting.
Revising the tip program requires a thoughtful approach, and several missteps by the IRS could threaten participation by employers and employees. If the IRS insists on trying to capture every dime of possible tax revenue through unreasonably high tip rates, the employees will not participate. The erroneous audit notices also have increased skepticism among the employees that the program really is a good deal. If the IRS is indifferent to the employer’s administrative burden, and if the workforce is unhappy with the tip rates, employers will be reluctant to participate.
For the tip program to succeed in the future, there must be a sense of mutuality of benefit and cooperation. If the IRS embraces fair and reasonable tip rates for gaming employees, renews the employees’ trust about protection from audit under the upcoming agreements and recognizes a reasonable tip reporting system by the employer, it will continue to benefit from a strong, assured revenue collection at dramatically-reduced enforcement cost. That would be an arrangement that the government, our industry, and most importantly, our employees, all could live with – and benefit from.